AOL announced it would sell or licence its entire portfolio to Microsoft for $1.1bn putting the software giant in control of some of the core patents from the early days of the World Wide Web.
The deal has left tech giants like Amazon, eBay and others biting the dust as Microsoft bagged AOL Inc’s patents. This time round, Microsoft beat Google in the patents race, providing fresh ammunition to heated corporate wars.
Tech giants ranging from Amazon to Google to Facebook have been at logger heads with regard to patents. The biggest patent sale was from the bankrupt Nortel Networks last year when 6,000 patents were on offer for a whopping $4.5 billion – roughly $1.05 million per issued patent. Microsoft was part of the group led by Apple Inc. This unprecedented deal sparked a wave of patent sales and litigation and played a part in AOL’s decision to launch a patent auction.
“It sounds like the cold war arms race,” said Ron Laurie, a patents expert in Silicon Valley. “Microsoft is looking at Google sitting on a pile of basic infrastructure patents and wanted to respond.”
At $960m, or $1.2m per patent, the price paid for the part of the portfolio that Microsoft is buying from AOL represents a new high point among recent sales, topping the $700,000-$750,000 in deals such as those involving Motorola and Nortel. It will also pay $100m to license AOL’s remaining 300 patents.
AOL is selling more than 800 patents to Microsoft for $1.056 billion in cash but will license rights related to advertising, search, social networking, content generation and management, mapping, e-commerce and mobiles. The Windows-makers’ surprising investment sent AOL shares up more than 40%.
Microsoft will license 300 more patents.
A person close to the sale said 800 patents bought by Microsoft include key internet functions involved in email and messaging, as well as mobile and location based technologies that have come to assume greater significance as the Internet has gone mobile.
However, the additional 300 patents and patent applications will not be exclusive to Microsoft. As part of the deal, AOL has been granted a license to the patents it has sold to Microsoft.
“The agreement with Microsoft represents the culmination of a robust auction process for our patent portfolio,” said Tim Armstrong, AOL’s Chairman and CEO. “We continue to hold a valuable patent portfolio as highlighted by the license we entered into with Microsoft. The combined sale and licensing arrangement unlocks current dollar value for our shareholders and enables AOL to continue to aggressively execute on our strategy to create long-term shareholder value.”
Microsoft general counsel Brad Smith said that his company was following AOL’s patent portfolio for “years” and the purchase enables the company to own “certain patents that complement [Microsoft’s] existing portfolio.” The transaction is expected to be completed by the end of this year
Armstrong claimed last month that AOL’s intellectual property rights included “some of the foundation patents for the Internet” and described its holdings as “beachfront property in East Hampton”.
In an interview on Monday, he described AOL’s patent portfolio as uniquely strong, saying that while in most portfolios 5 to 10 per cent of patents are high quality, “we had closer to 50 per cent that was top tier.” He also indicated that the portfolio was relatively unencumbered by licences, leaving Microsoft a freer hand in enforcing the patents.
“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,” Anthony DiClemente, an analyst with Barclays Research, said in his comments.
Evercore Partners and Goldman Sachs advised AOL on the transaction, and Wachtell, Lipton, Rosen & Katz and Finnegan, Henderson, Farabow, Garrett & Dunner provided legal counsel to AOL.
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 monetised.
The deal, expected to be completed by the end of 2012, includes the sale of an AOL unit, on which the company expects to register a capital loss.
AOL said it expected to use about $40 million of its existing deferred tax assets – 20% of its total – to offset any ordinary income taxes resulting from the licensing of its remaining patent portfolio.
“Through the purchase of the patents, Microsoft is has an edge over other giants,” Peter Donelly, tech analyst at James and Peterson, California told Arabian Gazette. “The edge comes in form of Netscape’s patents.”
The software giant would obtain control of core patents that were developed by former arch rival Netscape, the pioneering company that vanquished in the Web’s early browser wars and which was later bought by AOL. “This would potentially open new fronts in the industry’s patent war,” Peter said.
Selling Netscape patents puts AOL in a win-win situation as well. This would allow AOL to recognize tax losses from the acquisition to offset the profits from its patent sale. “This makes shareholders and other investors very happy,” a person close to deal said.
The purchase comes soon after regulators approved both Google’s $12.5bn purchase of Motorola Mobility, a deal prompted mainly by Motorola’s patents.
There has been no love lost between Google and Microsoft. The move to purchase Netscape patents is making experts question Microsoft’s intentions. “Microsoft has been planning this purchase for the past one year and we feel that in the next year or so it intends to revamp some of its software, by giving Google a run for its money,” Mike Sawyer, CEO of Tech Now magazine, told Arabian Gazette.
“However we feel there is more to this story than that meets the eye,” Sawyer added while referring to the aspect that apparently Microsoft was forewarned about the selling of patents before other tech companies were aware of the offer. “There is a rumor that the board had unofficially decided to sell the patents to Microsoft and accepting other bids was simply to follow protocol.”
If the deal falls through, Microsoft will pay AOL a termination fee of $211.2 million, AOL said in a regulatory filing.
AOL owns news sites like Huffington Post, Engadget and Techcrunch, but bulk of its income comes from providing dial-up Internet services.