AOL Sells 800 Patents For $1.1 Billion To Microsoft [Memo To Staff]

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This just in: one chapter of AOL’s patent journey is coming to an end. The company is selling 800 patents to Microsoft for just north of $1 billion: $1.056 billion in cash to be exact.

Tim Armstrong, the CEO of AOL (which owns TechCrunch), says that the company will continue to hold on to about 300 patents and patent applications after the sale. These span “core and strategic technologies” around advertising, search and content generation, he noted in a memo to employees. [Full memo below the break.]

The sale to Microsoft came after a “competitive auction process” the company noted in a statement. It also includes the sale of the stock of an AOL subsidiary (unspecified which in the statement) “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 also said it “expects to utilize 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.” We have reached out to try to get more specifics on the subsidiary and so licensee information for the remaining patents.

The sale is expected to be completed by the end of 2012.

The patent sale marks the end to a lot of speculation around what AOL would do with its patent trove. There had been pressure from shareholders, led by Starboard Value, to realize some of the value from those patents, starting last year, when investors began to grumble that the company was not focused enough on what it could be doing to make more money, and not monetizing fast enough on its growing media portfolio (of which TC is a part…).

The patents also came into question in March with the news that Yahoo was suing Facebook over several patent infringements.

Given that AOL’s portfolio also stretches into similar areas of social media and information organization, there were questions of whether AOL would also follow suit in a march to the courts — another route to realizing value from those patents.

The portfolio sold today patents related to advertising, search, content generation/management, social networking, mapping, multimedia/streaming and security, among other things. AOL has also received a perpetual license for all the patents as part of the deal, Armstrong said in his memo.

The sale not only neutralizes the possibility of AOL using those patents in a litigious way against Facebook (or others as the case may be), but it may also mean that Facebook is out of infringement hot water, as far as those patents are concerned: Microsoft became a shareholder in the company when it bought a 1.6 percent stake of Facebook back in 2007 for $240 million.

The question of what Microsoft intends to do with these patents is the next big question. Among the patents are several related to mobile and internet messaging (via AOL’s acquisition of ICQ). Others cover areas like location-based services and personalized content delivery. The most patents of all, however, come in the generic category of “online communications”, according to analysis from Envision IP.

The full memo:

As we continue to execute on our strategy of building premium brands, services, and advertising into world-class businesses, we also continue to unlock value in our assets that make the company stronger and show meaningful gains for AOL employees and shareholders.  Today, I’m excited to share that we achieved another critical milestone in our growth trajectory.

This morning, we announced that we’ve agreed to sell 800 of our patents and their related applications to Microsoft for $1.056 billion in cash. Most importantly, for the future growth trajectory and innovation for our business, we will continue to hold a significant patent portfolio of over 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. AOL also received a perpetual license to the patents being sold to Microsoft, which allows us to continue to innovate and drive strategic growth across all areas of our business.

This process of unlocking the value of our patent portfolio, that we began last fall, is a significant example of focusing our time and energy around strengthening our company’s balance sheet and unlocking value for our shareholders. Most importantly, this is another step forward for the comeback of AOL and allows us to remain laser-focused on our strategy and future growth. As always, we know that our growth will be driven by the successful execution against our strategy and we will continue to take aggressive steps to move the company forward.

Huge thanks to the teams that worked tirelessly during this intense process – their world-class effort resulted in a big win for our company. The AOL Board of Directors, Legal, Finance and Tax teams, and our outside advisors were super-stars. We are a partnership company and our team stayed together every step of the way and performed at the top of their game.

Additionally, we worked with a great Microsoft team on this deal – they were organized, professional and smart. When I spoke to Steve Ballmer over the weekend I commended him on his team and how great they were to work with in this process.

We will be holding a global employee call on Wednesday at 11am ET to talk about the news we have announced today in detail, as well as discuss our company goals for Q2, top box priorities and hear updates from our leadership team on progress we are already making in Q2. We’re already seeing strong momentum this quarter on our focus areas. Details for the call will be posted to the Inside, and please bring your questions as we’ll have time for Q&A.

Time to get back to the core business – delighting consumers and customers.  We are starting Q2 off with a major win.  Let’s keep it going and nail all of our Q2 goals – looking forward to reviewing with all of you on Wednesday on our global call.

Go AOL – TA

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