AOL Inc. (AOL:US) investor Starboard Value LP (STAVOLP:US) said the sale of patents to Microsoft Corp. (MSFT:US) doesn’t go far enough in solving the Internet company’s problems, urging it to find new ways to extract value from its advertising business.
Starboard asked AOL to return more cash to shareholders and reiterated plans to nominate candidates for AOL’s board, according to a letter from the investor to New York-based AOL today. Starboard first announced its plan to nominate five directors in February.
AOL said yesterday it agreed to sell more than 800 patents to Microsoft and license others in a transaction valued at $1.06 billion, triggering its biggest stock gain in more than two years. The company’s revenue has dropped 29 percent since it was spun off from Time Warner Inc. (TWX:US) in late 2009, putting it under pressure from shareholders such as Starboard that say it needs to find ways to generate more revenue from its assets.
“The announced sale of the patents does little to address our serious concerns with the company’s poor operating performance and substantial losses in the display business,” Jeffrey C. Smith, Starboard’s co-founder and chief executive officer, said in the letter. “Management and the board have been unable to meaningfully improve profitability in the display business and unwilling to consider alternative strategies.”
Maureen Sullivan, an AOL spokeswoman, didn’t immediately return a call seeking comment.
AOL fell 6 percent to $24.82 at the close in New York after jumping 43 percent yesterday.
‘Dismal Track Record’
Starboard, which owns about 5.3 percent of AOL, estimates the company’s display-advertising business is losing more than $500 million a year, including $150 million in Patch, a distributor of local news. Earnings before interest, taxes, depreciation and amortization, excluding losses from the display business, would have been $932.5 million in 2011, compared with the less than $400 million AOL reported (AOL:US), Smith said.
The New York-based firm also called for AOL to change a “dismal track record of capital allocation,” after the company said it would return a “significant portion” of the patent sale proceeds to shareholders.
“We do not understand why the company would only return a ’significant portion,’” Smith said. “Why wouldn’t the company simply return all of the proceeds?”
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