Patent Deal Good for AOL, But What About Microsoft?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yesterday’s announcement that Microsoft (NASDAQ: MSFT) had signed a definitive agreement to purchase 800+ patents from online content and internet services provider AOL (NYSE: AOL) was certainly a boon for AOL investors. The stock immediately jumped about 45% to the highest close in a year and half. Why all the hullabaloo? Shareholders love to get paid when management unlocks value, the other is it bought AOL management a bit of valuable time.
AOL responded to Starboard Value LP’s now public proxy fight to win seats on the board with a firm “thanks, but no thanks.” One of the biggest beefs Starboard has was all the untapped value that investors haven’t realized – one of the biggest being a bevy of strategic technology patents covering a range of goodies. The patents include various applications such as online advertising, search, content management and security.
AOL management went on to immediately announce much of the proceeds will be returned to investors – take that Starboard. Of course, by no means is the proxy fight over. Starboard Value LP is known for being activist investors. They buy as big a chunk of a company as they can and proceed to fight - if not for board control, certainly a loud voice on a company’s future direction. Just ask haircut giant Regis (NYSE: RGS) – a $1 billion dollar leader in hair franchises and retail salons, but one that is having a difficult time financially. Starboard recently won three seats on the company’s board – so this is nothing new.
What About Microsoft?
But lost in all this is the impact of the patents on Microsoft - not to mention the recent announcement of the company’s plan to expand their already impressive Cloud services by building a new data center in Wyoming. And by now investors know the buzz for the new Windows 8 has gone well, along with positive industry and consumer feedback for the new Nokia Lumia phone OS.
What should be most exciting is what the recent moves indicate about company management going forward. Clearly Microsoft is not just relying on the tried and true – Windows systems and the like – but is actively pursuing additional lines of revenue in their attempt to stay ahead of the curve. This is great stuff, and yet the stock languishes relative to rivals. And that’s on the heels of four straight quarters of operating income growth, a ridiculously sound balance sheet (debt to equity as well as ready cash) and three straight years of improving cash flow.
At current prices Microsoft is easily the least expensive option in the sector at just over 11 times earnings. This compares with IBM (NYSE: IBM) and Oracle (NASDAQ: ORCL) that trade at over 15 times earnings. Now those are reasonable valuations certainly, but help to highlight just what a bargain Microsoft is. And to add a little icing on the cake Microsoft shareholders enjoy a 2.58% dividend - one of the highest around. I’ve said it before in prior articles but it remains true – Microsoft is doing all the right things but has yet to be rewarded. And that’s great news for those who still want to get in on the fun.
Motley Fool newsletter services recommend Microsoft. The Motley Fool owns shares of International Business Machines, Microsoft, Oracle and Regis. timbrugger has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.