As AOL sells its patents to Microsoft a couple of thoughts come to mind. An interesting part of the current surge of patent acquisitions is that it is more effective than buying an entire company. In the world of mergers and acquisitions one company commonly buys another, in return for its own shares, in order to obtain patent rights, a market, or a product that it prefers to buy instead of develop. Mergers and acquisitions commonly include layoffs, sales of “excess” assets, and a lot of reorganization. Buying patents, as AOL sells it patents to Microsoft, may well be more cost effective than when Google picked up Motorola Mobility. Microsoft is not picking up a new business to manage. It is simply making good use of its cash trove and bypassing years of R&D in order to have in hand the rights to intellectual property necessary for its own search engine, advertising, and content generation business. For the investor interested in either of these companies, which becomes a good stock investment based upon this deal?

Obviously, AOL was a great stock to invest in last week, if one had known about the deal. As AOL sells its patents to Microsoft its stock price has risen consistent with its new pile of cash. We have written before about investing in Microsoft patents. Microsoft has lots of cash so if a billion or so is missing no one will really notice. What is pertinent here is that Microsoft is both gaining patents and limiting the rights of other companies to use the same ideas. The problem for other companies who want to develop similar applications is this. They need to develop from scratch. They also need to research the patents of Microsoft, Google, and others in order not to inadvertently use a “too similar” solution of a programming problem. If they do they are likely to be sued by the likes of Microsoft, Google, or others. In a world where Motorola sells out to Google and AOL sells its patents to Microsoft, the possession of patents amounts to an income stream as other software developers opt to purchase patent rights instead of trying to develop new software for old applications using laborious “work arounds” in order to avoid expensive and potentially ruinous lawsuits in the future.

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