Microsoft Buys into B&N Nook Business

After a contentious history of patent wrangling between Barnes & Noble and Microsoft, the two companies today announced that Microsoft will make a $300 million investment in Barnes & Noble’s Nook business, forming a new subsidiary, Newco. The formation of Newco puts a valuation of $1.7 billion on Barnes & Noble’s successful eReader and tablet business. Microsoft’s investment will give it an approximately 17.6 percent equity stake, while also assuring a Nook application for Windows 8 devices. The partnership also includes Barnes & Noble’s College business, which delivers the book retailer’s Nook-based study software and textbooks. William Lynch, CEO of Barnes & Noble, said the move was an important part in the company’s strategy to capitalize on the growth of the Nook business. “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,” Lynch said in a statement. The partnership also apparently settles patent litigation initiated by Microsoft, alleging patent violations related to Google’s Android operating system, the platform around which Barnes & Noble has built their Nook Color and Nook Tablet devices. Going forward, Barnes & Noble and Newco will have a royalty-bearing license under Microsoft’s patents for its Nook eReader and Tablet products. The Nook business has emerged as a major strength for Barnes & Noble, as the company’s retail business continues to struggle. In January, Barnes & Noble said it was considering all options to maximize its eReader segment, including a possible spin-off of the division. During an earnings call in January, Lynch told investors that it was the right time to investigate options for the Nook unit, adding that the Nook business is growing rapidly year-over-year and should be worth approximately $1.5 billion in comparable sales in 2012. Shares of Barnes & Noble were up almost 75 percent on the news, to $23.75, in early trading.