Microsoft Eyes AOL’s Patent Portfolio: An Investing Opportunity?

Thanks to last week’s mixed jobs data, Wall Street started the week on a shaky foot, sending the major indices down about 1% at open. Nonetheless, this morning did bring good news from the Mergers and Acquisitions front, and that is that Microsoft Inc. (MSFT) is acquiring over 800 of AOL Inc.’s (AOL) patents for $1.06 billion in cash. I’ll get into the details in a moment, but first I want to explain why deals like this are great news for the market.

Now, a ten-figure deal like this sounds big, but it really is a manageable investment for Microsoft, which has just under $30 billion in operating cash flow. For those of you who have kept up with my daily blog, you know that I consider M&A activity one of the best ways that companies can spend their excess cash (other than stock buybacks). This is because it generates excitement among traders and investors and fuels speculation about what other companies could become takeover targets. This causes cash to flood the market and fuels “Merger Mania.”

In the case of Microsoft, this isn’t a full-blown acquisition, but it still represents a smart business move. With an additional 800 patents under its belt, Microsoft will be better equipped to take on its giant competitors, most notably Google Inc. (GOOG). By expanding its portfolio, Microsoft will have greater control over technologies related to advertising, search engines, social networking and security. Analysts consider this deal a relative bargain for Microsoft because the company is acquiring almost three-quarters of AOL’s patents at a fraction of what a full-blown buyout would have cost.  

The move to acquire AOL’s patents comes on the heels of Microsoft’s Board declaring a dividend of $0.20 per share. The payment, which works out to a 2.5% annual yield, is payable on June 14 to shareholders of record on May 17.

As to be expected, this morning’s news caused investors to scoop up shares of AOL—shares surged over 46% today. MSFT remained flat today. Now, although I consider this deal a boon for the market, I don’t necessarily recommend diving head first into AOL. The stock is currently a C in my Portfolio Grader tool due to lackluster fundamentals and buying pressure. As a B-rated stock, MSFT fares a little better, but a drop in buying pressure could easily send this stock into hold territory.

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