Armstrong: Billion-dollar patent sale isn’t about breaking up AOL

While it’s easy to understand why some observers see Tim Armstrong’s sale of the bulk of AOL’s patent portfolio to Microsoft (s MSFT) as a major step towards selling the Internet portal for parts, I’m not there — yet.
And neither is Armstrong, he insisted in an interview with paidContent. “This was by no mean a step to breaking up the company,” he said, instead describing it as more about preserving it. (Yes, I can see the skeptics shaking heads; Armstrong got where he is by being a master salesman after all.)
To that end, Armstrong, the largest individual shareholder as well as chairman and CEO, protected what he sees as the core patents — those having to do with the media company AOL (s AOL) is now — instead of selling it all during this bull market for patents. (As a major shareholder, Armstrong also stands to benefit personally from the sale. Jeff Bercovici ran the numbers.)  AOL can use the 800-plus patents Microsoft acquired in perpetuity; Microsoft gets a non-exclusive license to the remainder that extends as long as the larger company meets certain unspecified conditions.
AOL kept the patents as part of its spin off from Time Warner. Armstrong says they considered selling them two years ago and again soon after that but held on. This fall, they started the process in earnest; if I have the timeline right, before Armstrong made a public statement about its value.
When he did go public, analysts priced the portfolio well under the $1 billion Microsoft is paying. AOL General Counsel Julie Jacobs says, “The outsiders that were valuing these do not understand patents and didn’t understand what we had.”
Instead, aided by the increasing interest in patents as competitive ammunition, the patent sale plus the licensing brought in roughly as as much as Armstrong has made from selling a mix of AOL assets since the spinoff. (That includes ICQ, which sold for $175.5 million to Digital Sky Technologies.) The patent sale and the announcement that a signifiant portion of the cash would be going to shareholders sent the share price rocketing — up more than $7 at one point and closing at $26.35. That’s more than double the $10.22 price when AOL announced a surprise $250 million stock buyback last August. A year ago, the stock was just over $20.

AOL Stock Chart Post-Patent Sale

AOL data by YCharts

Armstrong admits the core business is trading at $12 a share or less; the other $15 is cash on hand per share or the amount of cash AOL would have per share at the end of last year with this deal in hand.
The patent sale comes against a backdrop of other changes at the constantly evolving AOL, including the recent dismantling of its communication group and the departure of Brad Garlinghouse, among others. This version of AOL centers on content and advertising, with the dwindling but still important infusion of cash from its ISP business. (Just last week, AOL made some changes to the areas managed by Huffington Post Media Group head Arianna Huffington. )
When I asked if it was a content and advertising company now, Armstrong instead described a focus on building “very valuable” brands, services and brand advertising. “We’ve simplified the company now in terms of employees and assets. We’re tightly focused and well capitalized.”
One way of looking at it is that Armstrong plans to be as canny about selling the rest of the assets as he was about patents, waiting for the best market value piece by piece. Another, more likely interpretation: whether you agree with him or not, Armstrong sees more value that can be built into this version of AOL. If he can raise revenues and margins, he’s taken a mature Internet company into a profitable direction; if he can’t, there’s still money in the parts.
Armstrong on Instagram
I spoke to Armstrong a few minutes after the announcement of another $1 billion deal — Facebook’s acquisition of Instagram. The comparison is inevitable: one billion dollars for a portfolio of patents stretching back light years in internet time, including those that powered Netscape, while a 10-person startup is getting a billion for sharing other people’s pictures.
“Instagram’s a great product,” Armstrong said. “I’m not surprised at all that price. I think it points to a couple of things: how important this space is overall in the world that in one day there were two billion-dollar deals done with three of the biggest players.  It will be seen as something smart for Facebook’s platform.” And, he added, it shows that “the internet is in the first few innings still.”