On April 5, 2012 – Microsoft announced that it has reached an agreement with AOL to buy and license more than 900 patents from AOL in a $1.056B deal. The transaction took place at an open auction that included submissions from firms such as Goldman Sachs (not normally a patent buyer) and Facebook. Tim Armstrong, AOL CEO, expects the arrangement will generate another $100M over the life of the patents. Less than three weeks after the deal with AOL, Microsoft turned around and sold about 650 of those patents to Facebook for $550M, and granted the social-networking site a license to use the remaining patents it purchased from AOL. Microsoft also retained a license to use the AOL patents it sold to Facebook.

Once has to be in awe at how amazingly fast this second deal was thought of, structured, vetted internally, proposed, drafted, reviewed, negotiated, documented and closed! Having taken part directly and witnessed firsthand in the past numerous deals of similar nature (but of much smaller magnitude), I have never seen anything of this complexity between two fortune 500 companies be concluded so quickly. One has to wonder (and this is pure speculation for now) if the negotiations between Microsoft and Facebook did not start way before the two parties presented competing bids to the AOL portfolio and whether AOL’s shareholders really got the full benefit of a real auction… The IAM magazine recently gave some weight to those observers who have referred to the transaction as a “fake” auction. Since both deals are subject to antitrust review, we may find out in the future.

In any event, at the eve of it long awaited IPO, there was a certain urgency for Facebook to join the “patent club”, just like Google had to do last year. At the end of 2011, it owned only 56 US patents, making it extremely vulnerable to both competitors and NPEs. Recently, the social networking company bought 750 patents from IBM. After the Microsoft deal, it now owns close to 1500! Those may have to be put to contribution sooner than later; just last month, Yahoo! sued Facebook over 10 patent infringement claims.

For AOL, this is a pure monetization play as it is trying to stop the bleeding and appease its activist shareholders. Indeed, AOL may put its IP on he block as a result of direct pressure from major investor Starboard, which owns a 5.3% stake in AOL. In February Starboard stated its intention to nominate five candidates to AOL’s board due in part to the firm not sufficiently monetizing its patent portfolio. Following the deal, Starboard congratulated the AOL direction but reiterated its intent to go forward with plans to file proxy materials with the SECT for selection of directors to AOL’s Board.
To douse the rebellion, AOL promised to share a significant part of proceeds from the sale with shareholders. As a result, AOL stocks surged to their highest level in a year, up 43% to $26.25 following the trade, adding more than $750 million to AOL’s market capitalization.

Industry analysts commented that the sale indicates that the fight for market share among firms is taking place across multiple fronts, including patent portfolios. Although Microsoft did not disclose what the patents cover, analysts state that the patents may cover advertising, search and mapping technologies, which may help Microsoft compete with Google. After the Microsoft deal, AOL still holds over 300 patents, to which it gave Microsoft a non-exclusive license. Hence, for half a billion dollars, it would appear that Microsoft acquired ownership or licensed rights to the entire AOL patent portfolio.

Microsoft has not commented on what the AOL patents cover or how the firm will use the patents. Reportedly, at least some of the patents come from AOL subsidiary, browser maker Netscape. Microsoft is currently in court against Motorola Mobility Holdings to protect intellectual property the firm claims related to the Windows Phone OS and Xbox gaming console. Some speculate Microsoft is trying to keep AOL’s patents away from its competitors.

These last two transactions only add to the flurry of deals that have been announced since the Nortel auction last summer and the subsequent acquisition of Motorola Mobility by Google. Realnetworks also sold several hundred patents to Intel and many others have changed hands recently. We can now say that patents have in fact become the currently of choice of the digital age and are now being treated as a distinct asset class.  Anyone who is ignoring this reality is doing so at its own peril.

Louis Carbonneau
Founder & Principal
The Point Law Group
Founder & CEO