AOL to Reap $1 Billion Windfall in Sale of Patents to Microsoft

Web Company's Shares Have Biggest Rise in More Than Two Years

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AOL Inc., under shareholder pressure to make strategic changes as its revenue declines, agreed to sell and license patents to Microsoft Corp. in a deal worth $1.06 billion. The deal set off the biggest gain in AOL shares in more than two years.

The internet company will sell more than 800 patents and related patent applications to Microsoft and grant the software maker a nonexclusive license to its retained patent portfolio, the companies said today in a statement.

AOL will hold more than 300 patents and patent applications after the deal. The transaction lets New York-based AOL generate additional funds amid slow advertising growth and a decline in its dial-up internet subscribers. The company, whose revenue has fallen 29% since its spinoff from Time Warner Inc. in late 2009, has faced pressure from shareholder Starboard Value LP to consider moves, including a patent deal.

"Few people were anticipating that they were going to generate $1 billion-plus dollars of cash," said Tom Forte, an analyst at Telsey Advisory Group in New York, in a phone interview today. "The company has done an incredible job of creating value from their patent portfolio."

AOL rose 34% in New York, to $24.67 a share, and earlier touched $25.19 for the biggest gain since Nov. 25, 2009. The shares had lost 8.2% in the past year, before today. Microsoft fell 1.1%, to $31.17.

AOL said it plans to return a "significant portion" of the sale proceeds to shareholders.

Had the patent deal closed last year, AOL said it would have had about $15 per share of cash on hand on Dec. 31. The company ended 2011 with $407.5 million in cash and equivalents, down 49% from 2010.

Starboard, which started pushing for change last year, had said AOL's patent portfolio could yield more than $1 billion. Patent-advisory firm M-Cam Inc. estimated that the portfolio would be valued at $290 million in a sale. Jeffrey C. Smith, Starboard's co-founder and CEO, declined to comment on the Microsoft transaction.

"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," AOL CEO Tim Armstrong said in the statement.

Under the terms of the deal, Microsoft will have to pay AOL a fee of $211.2 million if it chooses to end the transaction. The deal is expected to be completed by the end of 2012, upon receiving regulatory approvals.

AOL has struggled to revive revenue growth after separating from Time Warner , as the company competes for advertising dollars with Google Inc. and Facebook Inc. AOL's sales declined in each quarter last year and revenue this year is estimated to drop 3.7% to $2.1 billion, according to analysts' projections compiled by Bloomberg.

Armstrong had been in talks with private-equity firms as recently as September, when the CEO approached potential financial partners about combining AOL with Yahoo Inc., two people said at the time. Starboard had a 5.2% stake in AOL, according to a regulatory filing in March. The fund said in a Feb. 24 statement that it was "increasingly uncomfortable" with the direction AOL and the board leadership are taking.

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