A Monster Patent Deal Just Helped This Company

Internet portal AOL recently entered into an agreement with Microsoft (NAS: MSFT) to sell more than 800 patents to the latter for a cool $1.06 billion in a deal expected to be complete by the end of the year. And AOL became an investors' darling overnight, because the company made a commitment to give away a large part of the proceeds to its shareholders.

Yet other than boosting investor confidence, will such a move really help the company stage a turnaround? While the windfall gains may be great for those who held on to the stock during the price run-up, the deal may not be enough to reverse the company's fortune in the long run. Let's find out why.

AOL's headwinds
AOL's fortunes have been on the decline. Its revenue has fallen by almost 58% over the last five years. The company has increasingly tried to evolve into a media outfit through its acquisition of The Huffington Post and Tech Crunch, but it's had little success. The company's $315 million acquisition of The Huffington Post has not turned out to be the best decision, thanks to low ad-based revenue generation and perceived problems with Huffington's management. AOL also acquired Patch, a local news site which made losses amounting to $150 million last year amid negligible revenue generation of about $10 million. Given this scenario, the patent sale is a probable last-ditch attempt to regain shareholder confidence.

So what's in it for Microsoft?
At the same time, Microsoft probably did not mind paying a slightly higher price for the patents as part of a long-term defensive move. This was the only way to prevent these patents from falling into the hands of rivals and hold off against patent lawsuits. After all, patent lawsuits have increasingly become a weapon of choice for businesses to undercut their competitors and get some royalty payments to boot.

A worthless conclusion
What's surprising is that AOL managed to assimilate a significant amount of cash from its intellectual property, which seems to have been grossly undervalued at about $300 million by some analysts. The cash acquired might just buy the company some more time to decide what to do next. Although the company managed to generate better-than-expected fourth-quarter results, which showed a surprising improvement in terms of cost control and advertising revenue, it would take more than just one quarter for AOL to prove its mettle.

Apart from the share buyback program, AOL has not outlined any plans to spend the money on acquisitions or expansion of its existing lines of service. Add the fact that its revenue is expected to decline by 3.7% to $2.1 billion this year, and you'll understand why this company's prospects hardly look winning to me.

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At the time thisarticle was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft. Motley Fool newsletter services have recommended 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.

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