AOL Patents may be Worth Less than Expected $AOL

AOL (AOL) is exploring the options amid slow advertising growth and a decline in its dial-up Internet subscribers,” reports Bloomberg. “The company’s revenue has dropped 29 percent since its 2009 spinoff from Time Warner Inc. (TWX)”

One option the company, which is a popular stock with D.E. Shaw’s D E Shaw, Philippe Laffont’s Coatue Management and Jim Simons’ Renaissance Technologies, has to raise its revenue is its patent portfolio. AOL shareholder Starboard Value LP estimates that AOL’s 800+ patents would yield more than $1 billion in licensing income, according to Bloomberg on March 24.

David Shaw

On March 29, Bloomberg revealed a very different value estimate.

It reported that patent-advisory firm M-Cam was estimating AOL’s portfolio value at roughly $290 million in a sale. “That is the absolute ceiling price,” said M-Cam President David Pratt. “It’s worth much less than what investors have estimated, based largely on the fact that most of AOL’s patents are not commercially viable, or junk grade.” M-Cam’s estimate of the value of AOL’s patent portfolio is assuming that the company was bought solely for those patents. Business is rarely that simple.

In the case of AOL, there is the pure financial value to consider (as in M-Cam’s estimation) but there is also an intrinsic value  to consider – AOL is a household name. A buyer could pay more if he saw a greater long-term value in licensing those patents.

AOL hired Evercore Partners (EVR) to find a buyer for its extensive patent portfolio, and to explore some other strategies, such as taking the company private – a move that several private equity firms, including Providence Equity Partners, TPG Capital and Silver Lake, have approached the company about, “a lower valuation on AOL’s patents could hurt the company’s chances to generate enough dollars to spur a sale of the whole company.” AOL CEO Tim Armstrong has been in talks with private equity firms at least recently as September when Armstrong approached several firms as potential partners in combing AOL with Yahoo (YHOO).

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