AOL Inc. (AOL), a provider of online content, products and services to consumers around the world, recently announced that it would sell more than 800 of its patents for over $1 billion in an effort to unlock value for shareholders. While the stock initially jumped from around $18.00 to around $27.00 per share, the retracement has indicated that Wall Street remains pessimistic.
Underlying Problems Remain
The largest concern on Wall Street is the fact that the patent sale doesn't address serious concerns relating to AOL's display business. With more than $500 million per year in losses, this business is considered by the company to be a staple for the future, but is considered by investors to be a drain on valuable resources.
Investors like Starboard Value believe that the company should consider strategic alternatives for this asset. According to a recent 13D filing with the SEC:
We believe when adjusted for the pro forma cash balance from the patent sale, AOL's enterprise value is only $1.14 billion as of the closing stock price on April 9, 2012. AOL generated consolidated EBITDA of $387.5 million in fiscal 2011. When excluding losses from the Display business, we estimate EBITDA would have been $932.5 million in fiscal 2011. This implies that, after considering the material increase in stock price and pro forma increase in cash, AOL currently trades at 2.9x Enterprise Value / Consolidated EBITDA or 1.2x Enterprise Value / EBITDA (excluding Display losses). This valuation does not include any additional value for AOL's Display properties, Company-owned real estate, or any further monetization of AOL's remaining intellectual property. The underperforming Display business appears to be substantially weighing down AOL's potential valuation.
Little Trust in Spending Wisely
The second key concern is that AOL is not able to spend the proceeds from its patent sale wisely. While management indicated that they would return a "significant portion" of the proceeds to shareholders, many on Wall Street would like to see the entire sum returned. This could occur through either a dividend, special dividend or share buyback.
The rationale behind this concern isn't hard to follow either. Since 1999, the company has spent some $2.3 billion on acquisitions, but recorded a goodwill impairment charge of $1.4 billion in 2010 alone. Goodwill impairment is the difference between an acquisition cost and the current market value of the acquired business (e.g. carrying value exceeds the fair value).
Combined, these concerns have led Starboard Value to nominate its own slate of investors to the company's board, according to the same SEC filing:
As such, we intend to promptly file preliminary proxy materials with the Securities and Exchange Commission for the election of directors to the AOL Board at the upcoming 2012 Annual Meeting. We remain willing to engage in a constructive dialogue regarding the qualifications of our nominees and a mutually agreeable resolution on board composition. We believe this would be in the best interests of all shareholders.
Whether or not this solves AOL's problems remains to be seen, but it's no secret that Wall Street remains concerned about the company's future.