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Starboard keeps pressure on AOL

by Lou Whiteman | Published April 11, 2012 at 10:35 AM

AOL Inc.'s $1 billion deal to sell a portfolio of patents to Microsoft Corp. has failed to appease activist shareholder Starboard Value LP, with the investor in a letter late Tuesday, April 10, calling on the Internet company to do more to increase shareholder value.

Starboard, which owns a 5.3% stake in New York-based AOL and has nominated candidates to the company's board, in a letter to management called the sale of 800 patents "a big first step towards realizing the full value of AOL for the benefit of all shareholders." But the investor warned AOL against doing deals with the proceeds, preferring instead to see all the cash returned to shareholders.

"AOL has a dismal track record of capital allocation, having spent $2.3 billion on acquisitions since 1999 and recording a goodwill impairment charge of approximately $1.4 billion during 2010 alone," Starboard managing member Jeffrey C. Smith wrote.

Starboard has complained repeatedly about businesses including AOL's Patch Media Corp. community news websites and its display ad business that the investor says have been a drain on operations. The investor urged the company not to use the Microsoft funds to make acquisitions or invest new capital in those businesses, with Patch alone according to Starboard estimates costing the company upwards of $150 million per year.

"Although management stated its intention to 'return a significant portion of the proceeds to shareholders,' we do not understand why the company would only return a 'significant portion'?" Smith wrote. "We remain concerned that shareholder capital will continue to be used for poorly conceived acquisitions and investments into money-losing initiatives like Patch and other display properties."

Starboard said it intends to "promptly" file preliminary proxy materials for the election of its director nominees, but in the meantime "remain willing to engage in a constructive dialogue" regarding its nominees and a potential resolution on board composition that the firm said it believes "would be in the best interests of all shareholders."

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