Would shareholders be better off if AOL was more focused on generating licensing income from patents – rather than on running its business?

One of AOL’s largest shareholders – Starboard ValueLP (“Starboard”) – certainly seems to think so.  Starboard, which owns 5.2% of AOL, is an investment management firm focused on companies that it believes are undervalued.  Its web site states, “Starboard invests in deeply undervalued small cap companies and actively engages with management teams and boards of directors to identify and execute on opportunities to unlock value for the benefit of all shareholders.”

AOL was once one of the dominant players in the internet business, but its fortunes have tumbled in recent years.  In 2000, when AOL acquired Time Warner, the combined company had revenues of $30 billion a year and was worth $350 billion.  In 2009 the companies decided to “demerge.”  By then, AOL’s revenues were down to $3.2 billion, and have continued to slide ever since, to $2.4 billion in 2010.  The company managed to squeeze out a tiny $13 million profit in 2010.

Starboard wants to unlock the value in AOL’s patent portfolio.  In a February 24, 2012 letter to the AOL board, Starboard claims that it has had discussions with firms specializing in intellectual property valuation and monetization (a.k.a. “patent trolls”) that say the 800 patents in AOL’s portfolio could be worth up to a billion dollars in licensing income. 

Starboard says a number of large internet companies may be infringing AOL patents in such fundamental areas as “secure data transit and e-commerce, travel navigation and turn-by-turn directions, search-related online advertising, real-time shopping, and shopping wish list.”

Starboard, in fact, want to put its own “patent troll” on the AOL board:  Ronald S. Epstein, who is the founder and CEO of Epicenter IP Group LLC.

AOL claims to have taken “meaningful action” to “enhance shareholder return” and says it has already hired advisors to help it get more value from its patents.