AOL and Microsoft strike US$1bn monster 800 patent deal

9 Apr 2012

Internet firm AOL has struck a deal with software giant Microsoft worth US$1.056bn in which AOL will sell more than 800 patents to Microsoft. In addition, Microsoft will license 300 additional patents and patent applications from AOL.

In a deal that AOL describes as “tax efficient”, the online firm will return a “significant” portion of the proceeds to shareholders.

Following the deal, AOL will still retain a patent portfolio of more than 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.

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.

AOL says it also expects to utilise about US$40m of its existing deferred tax assets, representing about 20pc of its total deferred tax assets, to offset taxes resulting from the license of its remaining patent portfolio.

AOL says it will return a significant portion of the sale’s proceeds to shareholders but has yet to determine how. It says it will do so before the transaction closes.

AOL says that as of 31 December it would have had US$15 per share of cash on hand, or about US$407m.

Robust auction process for AOL patents

“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 licence 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.”

The transaction is expected to be completed by the end of 2012. Evercore Partners and Goldman Sachs acted as financial advisers and Wachtell, Lipton, Rosen & Katz and Finnegan, Henderson, Farabow, Garrett & Dunner acted as legal counsel to AOL in connection with the transaction.

“This is a valuable portfolio that we have been following for years and analysing in detail for several months,” said Brad Smith, general counsel and executive vice-president, Legal and Corporate Affairs, Microsoft.

“AOL ran a competitive auction and by participating, Microsoft was able to achieve our two primary goals: obtaining a durable licence to the full AOL portfolio and ownership of certain patents that complement our existing portfolio.”

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years