Facebook Paying $550 Million for Some of AOL’s Patents

Facebook Inc. (FB) is beefing up its intellectual property arsenal by paying $550 million for some of the patents Microsoft Corp. (MSFT) recently agreed to buy from AOL Inc. (AOL)

Facebook, the world’s largest social network, will obtain about 650 AOL patents and applications, as well as a license to AOL patents and applications that Microsoft will purchase and own, the companies said in a statement today.

Patent disputes are increasing in the technology industry as competitors fight over intellectual property rights to key breakthroughs in areas, such as mobile technology and social media. The Microsoft deal may bolster Facebook’s defense against infringement allegations by Yahoo! Inc., said Brian Wieser, an analyst at Pivotal Research Group LLC.

Today’s deal “helps Facebook, hurts Yahoo,” said Brian Wieser, an analyst with Pivotal Research Group LLC. “Yahoo is counting on seeing some money from Facebook, and maybe didn’t expect such vigorous defense.”

Microsoft said earlier this month that it would pay $1.06 billion for a portfolio of AOL’s patents. Under the terms of the auction, companies couldn’t band together to bid jointly, and AOL didn’t permit offers for part of the portfolio, said a person with knowledge of the matter, who declined to be named because the negotiations were private. Microsoft bid with the intention of reselling most of the patents and always considered Facebook the most likely buyer, the person said.

Selling Opportunity

“Anytime someone buys a huge amount of patents, there’s an opportunity to sell the ones you don’t need,” said Ron Laurie, managing director of Inflexion Point Strategy LLC in Palo Alto, California, which counsels companies on intellectual property purchases.

AOL, under shareholder pressure to reverse sales declines, sold and licensed more than 800 patents to Microsoft earlier this month. AOL would still hold more than 300 patents and applications after the transaction.

The portfolio that AOL is selling includes patents that cover e-mail, instant messaging, browsing, search, advertising and other Internet-related technologies, according to another person with knowledge of the matter. The patents also cover handsets, e-commerce and long-term evolution (LTE) wireless communications, this person said.

Jonathan Thaw, a spokesman for Facebook, declined to comment. Kevin Kutz, a spokesman for Redmond, Washington-based Microsoft, and Maureen Sullivan, who represents New York-based AOL, didn’t immediately respond to requests for comment.

Facebook’s Earlier Effort

Facebook made an offer for AOL’s patent portfolio before losing out to a higher Microsoft bid, two people with knowledge of the matter said last week.

Microsoft was particularly interested in AOL’s search patents and many of those will probably be among those it retains, the person with knowledge of the matter said today. Microsoft expects the transaction to close this year and doesn’t expect regulatory obstacles, the person said.

Even though Microsoft didn’t want to own the majority of the patents, it did want a license to all of them -- which it will get through this agreement. Microsoft also would have viewed a purchase by a rival like Google Inc. (GOOG) as negative, said the person with knowledge of the issue.

Facebook, based in Menlo Park, California, has lined up $8 billion of available credit from its IPO underwriters. Like more established technology companies, such as Apple Inc. (AAPL) and Google, it is buying intellectual property to protect itself from patent-infringement litigation.

Yahoo Sues

Facebook acquired 750 patents from International Business Machines Corp. (IBM), a person with knowledge of the matter said on March 22.

Yahoo, the largest U.S. Web portal, sued Facebook on March 12, alleging that the social network infringed patents covering such functions as Internet advertising and information sharing. Facebook fired back on April 3, accusing Yahoo of infringing on 10 patents through its home page and Flickr photo-sharing service.

“Nothing about today’s action changes the fact that Facebook continues to infringe our patents,” Yahoo said today in a statement. “Companies who purchase patents are often working from a position of weakness and take these actions to strengthen their portfolio. We see today’s announcement as a validation of our case against Facebook.”

Facebook in February filed for an initial public offering, seeking to raise $5 billion in what could be the largest Internet IPO on record. The company may seek a valuation of $75 billion to $100 billion, people familiar with the matter have said.

AOL fell 1 percent to $24.75 at the close in New York. Microsoft declined less than 1 percent to $32.12. Yahoo, based in Sunnyvale, California, slid 1.7 percent to $15.33.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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