If Microsoft Pays You $1 Billion, Run the Other Way

Microsoft (Nasdaq: MSFT  ) has another big check to cut.

AOL (NYSE: AOL  ) revealed earlier this week that it's selling 800 of its more than 1,100 patents to the world's largest software company. The $1.056 billion that AOL is receiving is more than welcome.

The market's generally loving this move. AOL shares moved a whopping 43% higher on Monday, and it's easy to see why. The online service pioneer closed out last week with a market cap of just $1.75 billion -- and an enterprise value of less than $1.5 billion. Even if AOL will only keep a chunk of Microsoft's money after taxes, it's clear that Mr. Market had underestimated the value of AOL and its underlying parts.

Hopefully, AOL won't fall into the same trap as Yahoo! (Nasdaq: YHOO  ) and Nokia (NYSE: NOK  ) , two companies that have been largely languishing since cutting 10-figure deals with Microsoft.

Yahoo!'s Carol Bartz inked a landscape-shaping deal with Microsoft three years ago, receiving billions in exchange for outsourcing its search business through Microsoft's Bing. Yahoo! proclaimed the 10-year deal as a victory, pointing out how it would generate $500 million more in operating income -- and $200 million less in operating expenses -- every single year.

It sounds good in theory, but where did this get Yahoo!? The stock closed at $17.22 the night before the deal was announced. Despite a monstrous stock rally over the past three years, Yahoo! is one of the few tech stocks trading lower. Yahoo! is paying the price of outsourcing its search business through Bing by relinquishing market share. Signing the deal with Microsoft was one of the reasons why Bartz was ultimately let go.

Nokia also felt it struck it rich when it agreed to champion Microsoft's fledgling mobile operating system last year.

"The value transferred to Nokia is measured in B's not M's," Nokia CEO Stephen Elop said at the time.

Even if Nokia were getting billions to put out handsets running Windows Phone, shareholders saw the billions of value transferred out of their portfolios. Nokia's stock has surrendered half of its value over the past 14 months.

"All I know is that Microsoft has once again tricked a weak-kneed giant into making it stronger," I wrote at the time of the Nokia deal, and I have to wonder if the same fate awaits AOL.

In theory, it shouldn't. Microsoft is paying so much for AOL's patents that it's hard to fathom why it just didn't buy AOL whole. It could certainly unload the dial-up business and build on AOL's traffic and display advertising stronghold. However, the outright acquisition of an out-of-favor dot-com titan probably wouldn't have been popular with Microsoft shareowners.

However, Microsoft obviously isn't paying more than $1 billion for the majority of AOL's patents if it didn't feel that they would be worth more in the future.

Logic is still on AOL getting the better of the deal, but the cursed history of companies taking Microsoft's billions can't be ignored.

You've got bail
If you haven't read about the two words that are giving Bill Gates and Steve Ballmer fits, it's a free report, so you as may well check it out now

The Motley Fool owns shares of Microsoft and Yahoo!. Motley Fool newsletter services have recommended buying shares of Yahoo!, Nokia, and Microsoft, as well as 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (5) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 12, 2012, at 10:59 AM, zaxbowow wrote:

    You are so on the money... I mean, I know exactly what you mean.

    Apple should never have accepted that bail-out from Microsoft.

    And stupid, stupid facebook for accepting those investments.

    Yeah, nothing ignorant about this article.

  • Report this Comment On April 12, 2012, at 11:54 AM, marv08 wrote:

    "Microsoft is paying so much for AOL's patents that it's hard to fathom why it just didn't buy AOL whole."

    Because it would cost another billion to get rid of all these CDs?

  • Report this Comment On April 12, 2012, at 1:17 PM, lucasmonger wrote:


    I don't know why you think the bail-out from Microsoft was all that bad. The alternative was bankruptcy for Apple.

    Apple was paid $150M to make Internet Explorer their default browser for a number of years. The lawsuits between the two companies got settled. Microsoft pulled together the largest Mac OS software development team in the world to update Microsoft office to work well on Macs. Steve Jobs then had the capital to invest in Apple research projects which led to the releases of Mac OS X, the iPod, iPhone and iPad - all to the detriment of Microsoft many years later.

  • Report this Comment On April 12, 2012, at 2:44 PM, zaxbowow wrote:

    @lucasmonger, you might want to serious look into getting your sarcasm sensor repaired. :)

  • Report this Comment On April 12, 2012, at 9:07 PM, TMFBreakerRick wrote:

    zaxbowow, I'm sure you know this, but the Apple and Facebook deals were NOT for $1 billion or more.

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