Facebook May Have Bid on AOL Patents

On April 9, Microsoft surprised investors and industry watchers by announcing it has acquired more than 800 patents and agreed to license an additional 300 patents from AOL for more than $1 billion. On April 20, Bloomberg reported that Facebook, which is expected to start trading publicly in mid-May, had initially bid on the patents, and lost out later to Microsoft.

Beleaguered AOL had been reviewing strategic alternatives for its patent portfolio for about a year. According to an April 9 Wall Street Journal article that cites an unnamed company source, the catalyst for the Microsoft deal wasn’t pressure from AOL’s activist investors, but rather it was an unsolicited bid for the portfolio from a company other than Microsoft about six weeks prior. This company may have been Facebook.

Neither Microsoft nor AOL disclosed the specific patents involved in the deal. However, according to Envision IP, an intellectual property research firm, AOL owned 81 patents related to browser technologies and user interfaces and 77 patents related to search engine technologies. PC World argues these may have been of strategic importance to Microsoft against rival Google, which is why it paid a premium price.

So what might have prompted Facebook, which filed to go public in February, to make an unsolicited bid for the AOL patent portfolio? According to Envision IP, AOL owned 29 patents that could be applied to social networking systems. These patents cover online forum moderation, access controls and privileges in online communities, and publishing content to a community based on interests. AOL also owned patents related to wireless technologies, online advertising technologies, and location-based services.

Patents and other intellectual property have been the subject of several recent acquisitions, including those from Novell, Nortell Networks and Motorola Mobility. They have also been the cause of disputes.

Facebook’s February 1 S-1 Registration Statement with the Securities and Exchange commission lists lawsuits as a potential risk factor, stating, “We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have a significant impact on our business, financial condition, or results of operations.”

Even as Facebook’s IPO draws near, the company seems to maintain a high profile instead of quietly settling its patents disputes. On the same day Microsoft unveiled the AOL deal, Facebook said it is buying photo-sharing company Instagram, for $1 billion. According to the Wall Street Journal, the deal was finalized in three days.

The Bloomberg article cites an unnamed source saying Microsoft intends to sell most of the newly acquired patent portfolio because it doesn’t consider all of the 800 patents and related applications essential to its intellectual property arsenal. Unlike AOL, which likely refused to break up its portfolio, or negotiate on the price, Microsoft may also be more flexible when it comes to shedding the non-core patents. This means that if Facebook is still interested, the second time might be the charm for Facebook’s bid at AOL’s patents.

As of December 31, 2011, Facebook has cash on its balance sheet of $3.9 billion, and a credit agreement to borrow up to $2.5 billion.

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