(Reuters) – Microsoft trumped
Amazon, eBay and other tech giants with its more than $1 billion purchase of the majority of AOL Inc’s patent
trove.
the building housing the companies corporate headquarters in New York May 28, 2009. REUTERS/Lucas Jackson
AOL said it was selling more than 800 patents related to advertising, search, e-commerce and mobile
to Redmond, Wash-based company, surprising investors with the size of the deal and sending AOL shares up more than 40
percent.
The sale includes technology rights from AOL’s current and former businesses, ranging from Netscape, ICQ and
MapQuest to CompuServe, Advertising.com and others, according to a source close to the matter.
The sale process, which
AOL Chief Executive Tim Armstrong described as a “full-blown dynamic auction,” started last fall after board
approval.
Armstrong said he made a call to Microsoft Chief Executive Steve Ballmer alerting him of the decision to
sell the patents.
The auction included e-commerce companies Amazon and eBay, both of which have been largely absent
from the recent patent wars, as well as Google and Facebook, according to the source.
Spokesmen for Google, Facebook,
eBay and Amazon were not immediately available for comment.
A final buyer was selected late on April 5, Armstrong
said.
Technology companies in recent years have sparked a frenzy for patents, bidding up prices in a defensive move to
keep competitors at bay.
The AOL deal is one of the larger patent auctions in recent times, representing roughly $1.3
million per issued patent, according to the source.
That compares with the bankrupt Nortel Networks patent auction
last year — considered a blowout $4.5 billion sale of its 6,000 patents — for roughly $1.05 million per issued patent, the
source said.
The Nortel deal sparked a wave of patent sales and litigation and played a part in AOL’s decision to
launch a patent auction.
Google is in the process of buying Motorola Mobility Holdings for $12.5 billion mainly for
its intellectual property. Google also acted as the stalking-horse bid for Nortel Networks’ wireless
patents.
Microsoft was part of the group led by Apple Inc that won the Nortel patents.
Yahoo has launched a
lawsuit against rival Facebook for patent infringement involving advertising.
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AOL and
Microsoft are no strangers to partnerships. Last year the two companies along with Yahoo formed an advertising
alliance.
Microsoft’s latest move with AOL proves it is keen on shoring up its patent portfolio.
“Investors
had anticipated little to no value for the portfolio – a few hundred million at the most,” said Clayton Moran, an analyst
with Benchmark.
AOL said a “significant portion” of the proceeds would be passed on to its shareholders.
As
part of the deal, AOL will continue to hold more than 300 patents related to key strategic areas for the company, including
advertising, search, and social media, and will receive a license to the patents being sold to Microsoft. Also, Microsoft
will be granted a non-exclusive license to the patents AOL retains.
“We think this move is a big win for AOL in both
the speed at which the sale was made and the actual amount it received,” wrote Anthony DiClemente, an analyst with Barclays
Research.
AOL shares soared $7.87 to $26.29 in afternoon trade.
One of the pioneering companies during the
early days of the Internet, AOL was known for e-mail and dial-up access services. It has been trying to reshape itself into a
media and entertainment powerhouse dependent on advertising revenue.
Activist shareholder Starboard Value LP had
pressed AOL management to pursue a patent auction, arguing the portfolio could produce more than $1 billion in licensing
income if properly monetized.
The deal, expected to be completed by the end of 2012, includes the sale of an AOL unit,
on which AOL expects to record a capital loss for tax purposes.
AOL said it expected to use about $40 million of its
existing deferred tax assets — 20 percent of its total — to offset any ordinary income taxes resulting from the licensing
of its remaining patent portfolio.
Evercore Partners and Goldman Sachs acted as financial advisers to AOL. Wachtell,
Lipton, Rosen & Katz and Finnegan, Henderson, Farabow, Garrett & Dunner acted as legal counsel. Covington and Burling
LLP offered legal advice to Microsoft.
If the deal falls through, Microsoft may pay AOL a termination fee of $211.2
million, AOL said in a regulatory filing.
(Additional reporting by Sayantani Ghosh in Bangalore and Greg Roumeliotis in New
York; Editing by Supriya Kurane and John Wallace)