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Barnes & Noble turns a page with Microsoft investment

by Lou Whiteman | Published April 30, 2012 at 11:01 AM

Microsoft Corp. will invest $300 million for a minority stake in the digital business of Barnes & Noble Inc., establishing a strong valuation for the unit that makes B&N's popular Nook e-reader.

Terms of the deal, announced Monday, would give the software giant a 17.6% stake in a Barnes & Noble subsidiary that houses the company's digital and college businesses, valuing that unit at $1.7 billion.

The two companies said they would work together to "accelerate the transition to e-reading," and combine resources as they attempt to keep pace with Apple Inc.'s iPad tablet and Amazon.com Inc.'s Kindle.

The investment delivers a much-needed boost to New York-based Barnes & Noble, which has been scrambling to reinvent itself to avoid the fate of now-liquidated former rival Borders Group Inc.

Barnes & Noble has invested heavily in its Nook e-reader, but has still come under pressure from investors eager to speed the transformation.

Last week activist hedge fund Jana Partners LLC disclosed it had acquired an 11.6% stake in the chain, ranking it as Barnes & Noble's third-largest shareholder behind company founder and chairman Leonard Riggio and Ron Burkle's Yucaipa Cos. LLC. Another hedge fund, G Asset Management LLC, in February disclosed a 5% stake in the company.

Redmond, Wash.-based Microsoft and B&N said that their partnership, for now called "Newco," would include a new Nook application for Microsoft's forthcoming Windows 8 operating system and a strong effort to push Nook's technology into the education market. The deal provides an established e-reader format for an expected wave of tablets coming with Microsoft's Windows 8, while expanding the number of potential users of B&N's services.

"The formation of Newco and our relationship with Microsoft are important parts of our strategy to capitalize on the rapid growth of the Nook business, and to solidify our position as a leader in the exploding market for digital content in the consumer and education segments," Barnes & Noble CEO William Lynch said in a statement. "Microsoft's investment in Newco, and our exciting collaboration to bring world-class digital reading technologies and content to the Windows platform and its hundreds of millions of users, will allow us to significantly expand the business." The companies also said they have settled patent litigation, and that Barnes & Noble and the new unit will both have a royalty-bearing license under Microsoft's patents.

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