AOL shares soar on $1.1B patent sale to Microsoft

But shareholders shouldn't pop champagne corks quite yet.

By Jonathan Berr Apr 9, 2012 11:42AM
Image: New Year celebration (© Stan Fellerman/Corbis)Shares of AOL (AOL), the once-pioneering Internet media company, climbed more than 40% Monday after the surprise announcement that Microsoft (MSFT) has agreed to buy more than 800 patents and license the rest of its portfolio for about $1.1 billion. 

A celebration, however, may be premature.

The patent sale, which activist investor Starboard Value LP had sought, doesn't address AOL's long-term problems, such as the poor returns the company has seen from Patch, its network of more than 800 hyper-local sites'; its dependence on its withering dial-up business; and the seemingly endless drama in its executive ranks.

Moreover, selling assets like patents -- even for big money -- is not a growth strategy. It's like selling the family silver to pay off an overdue credit card bill. AOL CEO Tim Armstrong, who recently signed a new employment agreement, wasted no time in patting himself on the back, saying in a press release that the agreement "unlocks current dollar value for our shareholders and enables AOL to continue to aggressively execute our strategy to create long-term value."

That's easier said than done. 

Revenue at the New York company has slumped about 30% since its 2009 spin-off from Time Warner (TWX). AOL is showing some signs of improvement, though revenue growth is nowhere in sight. The stock got an adrenaline shot in February after it reported better-than-expected fourth-quarter results. AOL reported its smallest revenue drop in five years, but saw profit plummet 66%.

Had the patent deal occurred at the end of last year, AOL would have had about $15 per share in cash on hand. The company plans to return most of the money to shareholders in the form of a special dividend or a stock buyback. Maybe some of the cash could be used for acquisitions. As of the end of 2011, AOL had $407.5 million in cash and equivalents, down 49% from 2010. So there are limits to its generosity.

But then what?

Like Yahoo (YHOO), AOL makes no sense in its current configuration. Most Internet users are not looking for a site that provides everything from email to stock quotes to celebrity news. Yahoo last week announced plans to slash 2,000 jobs, about 14% of its workforce.  Odds are strong that AOL will make a similar announcement. Data from Reuters show AOL generates revenue per employee of $389,064 and net income per worker of just $2,314. That's way below industry averages of $11.5 million for revenue and $2.16 million for net income.

The Microsoft patent deal gives AOL some breathing room to decide what to do next.  Unfortunately, the company does not have any more rabbits to pull out of its hat. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Jonathan Berr is a former AOL contract writer. He does not own shares of the companies listed here.

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