AOL (NYSE: AOL) has agreed to sell more than 800 of its patents and their related patent applications to Microsoft (NASDAQ: MSFT) and to grant Microsoft a nonexclusive license to its retained patent portfolio for around $1.1 billion.
Following the sale, AOL will continue to hold a significant 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, security and others. AOL also received a license to the patents being sold to Microsoft.
"The agreement with Microsoft represents the culmination of a robust auction process for our patent portfolio," Tim Armstrong, AOL's chairman and CEO, said in a statement. "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."
"This is a valuable portfolio that we have been following for years and analyzing in detail for several months," Brad Smith, general counsel and executive vice president of legal and corporate affairs at Microsoft, said in a statement. "AOL ran a competitive auction and by participating, Microsoft was able to achieve our two primary goals: obtaining a durable license to the full AOL portfolio and ownership of certain patents that complement our existing portfolio."
The transaction is expected to be completed by the end of 2012, upon the satisfaction of customary conditions and regulatory approvals, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Peter Kafka of AllThingsD reports that the patents in question are related to Netscape. He said:
AOL didnt disclose the name of that subsidiary in its press release, but a person familiar with the transaction has clued me in: Its Netscape.
Microsoft will buy the underlying patents for the old browser, but AOL will hang onto the brand and the related Netscape businesses, which make up a grab bag of stuff these days: An ISP, a URL, a brand name, etc.
Indeed, neither AOL nor Microsoft commented on what the patents were for specifically. If in fact the patents do cover Netscape technology, there would be huge irony in the acquisition, in that Microsofts leaders practically put the company on the line back in 1998 when it fought a landmark antitrust battle with the federal government and several states over bundling the Internet Explorer browser with Windows to beat back the threat of the upstart Netscape browser.
TechCrunch, which is owned by AOL, includes a copy of Tim Armstrongs memo to the staff in its coverage of the deal.
A strong patent portfolio has become a necessity in todays litigious technology business. In recent months, both Facebook and Google have acquired hundreds of patents from patent-rich IBM to bolster their patent portfolios.
AOL said 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 use 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.