Transfer Pricing Associates

Starboard's Qualms with AOL's Patent Deal

post Monday April 16, 2012


Last week, AOL Inc. completed a deal to sell 800 of its patents to Microsoft Inc. for $1.1 billion.  In addition to the patent sale, the deal also included an agreement that AOL will grant Microsoft a non-exclusive license to more than 300 patents and patent applications covering categories such as advertising, search, social networking, and content generation.  The struggling internet company’s aim to raise cash for its investors proved a success as AOL shares surged 45% the day following the patent sale.  Although, one of AOL’s largest shareholders, money manager firm Starboard Value Inc., says that the patent sale is a step in the right direction but that AOL still has many problems it needs to fix.

Following the patent deal, AOL’s board of directors publicly praised what they see as the company’s “first step in unlocking value for AOL shareholders”.  Apparently for the past couple of months, Starboard had been urging AOL to monetize its intellectual property portfolio which they see as very valuable and a tool, that if appropriately monetized could yield a lot of money for shareholders and further investment into the company.  With the recent patent sale, it seems like the company heeded the Starboard’s advice, but now Starboard is concerned that not all of the proceeds from the sale will be returned to shareholders and that instead the company will invest the money poorly as they say the company has done in the past.

Starboard Value owns a 5.3% share in AOL making it one of the company’s largest shareholders.  In a letter from Jeffrey Smith of Starboard Value to AOL’s other board members, Smith outlines Starboard’s dissatisfaction in how AOL has used shareholder money in the past, for “poorly conceived acquisitions and investments into money-losing initiatives”.  In addition to concerns of AOL’s track record with poor acquisition and merger choice, Starboard is also dissatisfied with the company’s poor operating performance and financial losses in their display ads business.  Starboard claims that AOL’s display business is experiencing losses of $500 million per year, with $150 million of those losses coming specifically from Patch (a group of community news websites).  Starboard claims that Patch is “an unproven and, thus far, unsuccessful business model that is draining valuable resources from the Company” and that the Board has been unwilling to improve profitability or consider alternative strategies for the display ad business and Patch.

So now, to deal with these issues head on, Starboard says it intends to file preliminary proxy materials with the Securities and Exchange Commission for the election of new directors to the AOL Board.  In February, Starboard said that it intends to nominate five members which include Ronald Epstein, CEO of Epicenter IP Group; Steven Fink, former CEO of Larry Ellison's investments; Dennis Miller, a strategic adviser to Lionsgate; Jeffrey Smith, CEO of Starboard Value; and James Warner, principal of Third Floor Enterprises, an advisory firm specializing in digital marketing and media. 

It will not be until AOL’s upcoming 2012 Annual Meeting that we will see how effective Starboard will be in getting its nominees “on board”, but it should be interesting to see if a change in the Board’s composition will be able to help revive the company. 

[Sources: Reuters & New York Times]


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