If Microsoft Pays You $1 Billion, Run the Other Way


Microsoft (NAS: MSFT) has another big check to cut.

AOL (NYS: AOL) revealed earlier this week that it's selling 800 of its more than 1,100 patents to the world's largest software company. The $1.056 billion that AOL is receiving is more than welcome.

The market's generally loving this move. AOL shares moved a whopping 43% higher on Monday, and it's easy to see why. The online service pioneer closed out last week with a market cap of just $1.75 billion -- and an enterprise value of less than $1.5 billion. Even if AOL will only keep a chunk of Microsoft's money after taxes, it's clear that Mr. Market had underestimated the value of AOL and its underlying parts.

Hopefully, AOL won't fall into the same trap as Yahoo! (NAS: YHOO) and Nokia (NYS: NOK) , two companies that have been largely languishing since cutting 10-figure deals with Microsoft.

Yahoo!'s Carol Bartz inked a landscape-shaping deal with Microsoft three years ago, receiving billions in exchange for outsourcing its search business through Microsoft's Bing. Yahoo! proclaimed the 10-year deal as a victory, pointing out how it would generate $500 million more in operating income -- and $200 million less in operating expenses -- every single year.

It sounds good in theory, but where did this get Yahoo!? The stock closed at $17.22 the night before the deal was announced. Despite a monstrous stock rally over the past three years, Yahoo! is one of the few tech stocks trading lower. Yahoo! is paying the price of outsourcing its search business through Bing by relinquishing market share. Signing the deal with Microsoft was one of the reasons why Bartz was ultimately let go.

Nokia also felt it struck it rich when it agreed to champion Microsoft's fledgling mobile operating system last year.

"The value transferred to Nokia is measured in B's not M's," Nokia CEO Stephen Elop said at the time.

Even if Nokia were getting billions to put out handsets running Windows Phone, shareholders saw the billions of value transferred out of their portfolios. Nokia's stock has surrendered half of its value over the past 14 months.

"All I know is that Microsoft has once again tricked a weak-kneed giant into making it stronger," I wrote at the time of the Nokia deal, and I have to wonder if the same fate awaits AOL.

In theory, it shouldn't. Microsoft is paying so much for AOL's patents that it's hard to fathom why it just didn't buy AOL whole. It could certainly unload the dial-up business and build on AOL's traffic and display advertising stronghold. However, the outright acquisition of an out-of-favor dot-com titan probably wouldn't have been popular with Microsoft shareowners.

However, Microsoft obviously isn't paying more than $1 billion for the majority of AOL's patents if it didn't feel that they would be worth more in the future.

Logic is still on AOL getting the better of the deal, but the cursed history of companies taking Microsoft's billions can't be ignored.

You've got bail
If you haven't read about the two words that are giving Bill Gates and Steve Ballmer fits, it's a free report, so you as may well check it out now.

At the time thisarticle was published The Motley Fool owns shares of Microsoft and Yahoo!. Motley Fool newsletter services have recommended buying shares of Yahoo!, Nokia, and Microsoft, as well as creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.