Facebook will pay Microsoft Corp $550 million for hundreds of patents that originated with AOL, beefing up its intellectual property arsenal.

The deal gives social network Facebook 650 patents and patent applications and license to another 275 patents and applications. It comes shortly before Facebook is expected to have the largest initial public offering in Silicon Valley history.

Patents have become a top priority for technology companies as many of them, including Google Inc and Apple Inc, become embroiled in patent-related lawsuits.

The patents, which Microsoft bought this year from AOL, cover a broad spectrum of technology, including mobile services, cell phone handsets, advertising and e-commerce, a source familiar with the situation said.

Microsoft trumped Amazon, eBay and other tech companies this month with its more than $1 billion purchase of most of AOL's patent trove. Valuing patents is a complex process, and it was not immediately clear whether Microsoft profited from the deal with Facebook.

Brad Smith, Microsoft's general counsel, said in a statement on Monday that the Facebook deal allows it to recoup over half of our costs while achieving our goals from the AOL auction.

Facebook was also a participant in the AOL auction, a source said at the time.

The auction included technology rights from AOL's current and former businesses, ranging from Web browser Netscape and instant messaging service ICQ to MapQuest and early online service CompuServe, the source said on condition of anonymity because the information was not public.

ALL OR NOTHING

Microsoft bought the AOL patent portfolio knowing that it was an all-or-nothing deal and always planned to sell a large number of them while retaining licenses to them, a source close to the Facebook deal said. Microsoft will retain a license to the patents and applications it is selling to Facebook under the terms of the deal.

The purchase marks Facebook's second recent move to bolster its patent portfolio, which consisted of 56 issued patents and 503 applications as of December 31, according to a filing with the U.S. Securities and Exchange Commission.

In March, it acquired 750 patents from International Business Machines Corp.

Facebook's deal with Microsoft comes as the world's No.1 social networking company prepares for an initial public offering that could value it at up to $100 billion and as it battles Yahoo Inc in court.

Yahoo sued Facebook earlier this year, claiming that Facebook had infringed 10 Yahoo patents, including several covering online advertising technology. Facebook countersued Yahoo in April, accusing Yahoo of infringing 10 of Facebook's patents.

Nothing about today's action changes the fact that Facebook continues to infringe our patents ... We see today's announcement as a validation of our case against Facebook, a Yahoo spokeswoman said in an emailed statement.

The deal for AOL's patents, which is subject to regulatory clearance, would help protect Facebook's interests over the long term, the company said.

Technology companies have sparked a frenzy for patents in recent years, bidding up prices in a defensive move to keep competitors at bay.

On July 1, 2011, Apple, Microsoft, Research in Motion Ltd and three other leading technology companies outbid Google to buy wireless patents from bankrupt Nortel Networks Corp for $4.5 billion.

Google quickly responded by successfully announcing plans to acquire Motorola Mobility Holdings, which owns 17,000 patents and 7,500 patent applications, for $12.5 billion.

The agreement between Facebook and Microsoft is the latest occasion that the world's No.1 online social networking service and the world's largest software company have teamed up.

Microsoft invested $240 million in Facebook in 2007 for what was then a 1.6 percent stake.

The two companies have forged various business collaborations over the years. Facebook features search results from Microsoft's Bing search engine in its social networking service as well as video chat technology provided by Skype, which Microsoft acquired last year.

Netflix Chief Executive Reed Hastings serves on the board of directors of Facebook and Microsoft.

Microsoft also has ties to Yahoo through a 10-year search partnership they struck in 2009.

(Editing by Leslie Gevirtz)

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