AOL Sells Patents To Microsoft For $1.1 Billion, Will Return Some To Shareholders

The promise that AOL’s (NYSE: AOL) patents have value was quickly realized as the firm sold Microsoft (NASDAQ: MSFT) $1.1 billion worth of patents. The patents numbered about 800.

The news should shut up Starboard, a firm which has been aggeitating for a board change at AOL. The money manager, which owns 5.5% of AOL,  has even argues that it should be able to gain several board seats. The patent sale may cut off a proxy war.

AOL announced

AOL Inc. said that the Company has entered into a definitive agreement to sell over 800 of its patents and their related patent applications to Microsoft Corporation  and to grant Microsoft a non-exclusive license to its retained patent portfolio for aggregate proceeds of $1.056 billion in cash.

Following the sale, AOL will continue to hold a significant patent portfolio of over 300 patents and patent applications spanning core and strategic technologies, including advertising, search, content generation/management, social networking, mapping, multimedia/streaming, and security among others. AOL also received a license to the patents being sold to Microsoft.

The patent sale includes the sale of the stock of an AOL subsidiary upon which AOL expects to record a capital loss for tax purposes and as a result, cash taxes in connection with the sale should be immaterial. Additionally, AOL expects to utilize approximately $40 million of its existing deferred tax assets, representing approximately 20 percent of its total deferred tax assets, to offset any ordinary income taxes resulting from the license of its remaining patent portfolio.

AOL management and its Board of Directors intend to return a significant portion of the sale proceeds to shareholders and will determine the most efficient and effective method to do so prior to the closing of the transaction. Pro forma for the sale and license, as of December 31, 2011, AOL would have had approximately $15 per share of cash on hand

The cash in hand is worth nearly what AOL’s shares at now. AOL could either create a dividend, a huge one-time special dividend ot buy back shares

AOL will still have to find a solution to its slow ad growth and shrinking ISP business, but for now. shareholder should be elated

Douglas A. McIntyre