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TECHNOLOGY

Zuckerberg Has a Sugar Daddy. Do You?

Even a 20-something billionaire could use a little help. He just got it from Microsoft--via a huge heap of AOL patents.
From left: Mark Zuckerberg, Marissa Mayer, Jack Dorsey, Phil Libin, Alberto Perlman

At a time when Yahoo sues Facebook, Apple sues Samsung, and Oracle sues Google for alleged patent infringement, a stockpile of legally protected intellectual property makes a handy weapon. It explains why companies whose salad days seem in the past, like AOL, have decided that holding the patents isn't as appealing as selling 800 to Microsoft for $1.06 billion.

The assumption was that Microsoft was extending its already massive holding of patents for potential legal action against competitors. And then the company sold 650 to Facebook for $550 million. Microsoft sells 80% or so of the patents for just over 51% of what it paid. Seems strange, right?

Maybe not. There's clearly more going on than meets the eye. It seems that Facebook has a strategic sugar daddy. It's not charity, just smart business that might make sense for you.

To help untangle the transaction, keep in mind the following:

  • Microsoft bought 1.6% of Facebook in 2007 for $240 million. That was at a $15 billion valuation that will likely soon be worth $1.6 billion at the expected $100 billion valuation Facebook will have at its IPO.
  • Microsoft beat out Google for the shares. Neither of those two companies have any affection for the other.
  • Google wants to undermine Microsoft's core business software and operating system businesses.
  • Google rightly fears Facebook as social networking is vital to the industry and Google is nowhere near at par in that area.
  • Google has been buying patents where it could get them. For defense, the company says. Yeah, everyone keeps a howitzer in the backyard, just in case.
  • Microsoft's search business partner Yahoo is suing Facebook for alleged patent infringement. If you're not ready to sell your portfolio, might as well see what some legal action could bring in.
  • Having more patents on hand means greater leverage in negotiations because of the potential to countersue.
  • Facebook just saw a drop in profits and faces growth challenges going forward. Given its impending IPO and the recent $1 billion Instagram acquisition, there is a limit to the cash it should spend.

Microsoft already had tens of thousands of patents and a big stockpile of money. So it entered the bidding, appearing like a wealthy shopper that really didn't need what it was buying. The final price to AOL was high enough to keep most others away.

After the partial reimbursement by Facebook, Microsoft was out just over $450 million—a huge sum, but still a rounding error in its bank book that may have brought consternation for its biggest competitor. (Did I mention that Microsoft's patent lawyers are pretty damned smart and understand the strategic and monetary value of what they buy and sell?)

That's why Microsoft was a strategic sugar daddy. Facebook isn't a "kept" company. The alliance between it and Microsoft offers mutual benefits in doing business.

Maybe it's time for you to gain a strategy sugar daddy. It could be an investor, customer, or business partner. It needs to be relatively large in relation to the size of your company and your competitors. It must gain a strategic advantage from doing business with you, and the advantage can't easily be replaced by your rivals. That might be access to technology, a particular market or customer, know-how, talent, or source of future profit.

The good news is that you may already have the beginning of a strategic sugar daddy, just waiting for you to correctly cultivate the relationship. The better news? It's strategic, so no need to get permanently married.

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Last updated: Apr 24, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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