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A major shareholder in AOL wants to shake up the firm's board, saying its billion-dollar patent deal with Microsoft wasn't good enough.

AOL has agreed to sell a bundle of more than 800 patents to Microsoft and license the rest of its intellectual property to the software giant and other firms.

In a filing to the Securities and Exchange Commission yesterday, Starboard said it was happy with the patent sale and licensing agreement with Microsoft, but it just wasn't enough to turn the firm around.

"The announced sale of the patents does little to address our serious concerns with the company's poor operating performance and substantial losses in the display business," Starboard said in a letter it also sent to AOL's board.

We estimate that AOL's display business is currently losing over $500 million per year, including $150 million in Patch alone.

Patch is an unproven and, thus far, unsuccessful business model that is draining valuable resources from the company.  Unfortunately, to date, management and the board have been unable to meaningfully improve profitability in the display business and unwilling to consider alternative strategies to realise value from these assets.

Starboard, which holds a 5.3 per cent stake in AOL, said that the current board – due for re-election at the firm's annual meeting – didn't adequately represent stockholders because its members only collectively own 1.8 per cent of AOL's shares.

Starboard wants other shareholders to vote for five directors it wants to see on the board, including its own CEO, Jeffrey Smith; former head of Larry Ellison's non-Oracle investments Steven Fink; and Dennis Miller, a strategic advisor to Lionsgate Entertainment. The four non-Starboard nominees own stock in AOL in their own right, while Starboard's CEO owns the 5.3 per cent stake through his company.

The hedge fund is also annoyed by AOL's refusal to hand over all the cash it made in the patent deal with Microsoft.

Starboard's letter said:

Pro forma for the patent sale, we estimate that AOL will have approximately $1.43 billion of cash, or $15.35 per share. This represents more than half of the current market capitalisation.

AOL said it would "return a significant portion of the proceeds to shareholders", but Starboard complained that it couldn't understand why the firm didn't give all the cash to investors, since it can't be trusted to invest the money sensibly.

The fund added:

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.

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.

AOL had not responded to a request for comment at the time of publication. ®

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