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The duo is pairing to create a new subsidiary, with Microsoft taking a 17.6% stake. Microsoft will invest an additional $305 million over the next five years.
The deal gives the tech giant a long-desired grip in the business of e-books and college textbooks, which are moving to electronic distribution.
Microsoft will highlight a Nook app later this year on its Windows 8-powered tablets. This will let it compete against Apple Inc.'s (Nasdaq: AAPL) iPad and Amazon.com Inc.'s (Nasdaq: AMZN) Kindle Fire.
"It's a good strategic deal," Sid Parakh, an analyst at fund firm McAdams Wright Ragen, told Reuters. "It gets Microsoft in the game for e-readers, and gives them access to a market that has been growing nicely and they've basically sat out of. It also makes Windows 8 a more compelling platform from an e-readers perspective."
Microsoft Moves To Mobile
Monday's deal is a new chapter for both companies, especially Microsoft.
Microsoft has been testing the waters of the e-book field but has yet to really get its feet wet. Since it launched e-book software in 2000, it has never been able to amass a significant library. In fact, this software will be shelved on Aug. 30.
"The shift to digital is putting the world's libraries and newsstands in the palm of every person's hand, and is the beginning of a journey that will impact how people read, interact with, and enjoy new forms of content," Microsoft President Andy Lees said in a statement.
Microsoft has been overhauling its approach to mobile, which has taken a back seat to Apple's iOS and Google Inc.'s (Nasdaq: GOOG) Android. This new deal may just take a bite out of Apple or have Google ogling.
The move could be a game changer for Windows 8, as well as the Nook. "For Windows 8 and Windows Phone to succeed, [Microsoft] needs a broad cross-section of devices," N. Venkat Venkatraman, a professor at Boston University's School of Management, told The Associated Press. "Amazon's Kindle Fire has over 50% of the of the Android OS Tablet market share in the USA, and B&N needs a credible road map for it to succeed."
Venkatraman sees huge potential for the partnership, adding, "It could well be part of a strategic move to combine parts of Nokia and Nook to create a stand-alone entity that jump starts Microsoft Windows Phone. It's an interesting strategic option play for Microsoft and B&N."
The Microsoft/Barnes & Noble union closes the book on an ongoing patent battle between the two companies surrounding the use of Android, which Microsoft claims violates its patents, on the Nook tablet. The resolution will give Microsoft royalties for those patents.
Why B&N Investors Cheered the Deal
The move is especially attractive to fading Barnes & Noble and its investors. BKS shares nearly doubled on the open Monday following the announcement to $26 a share, a three-year high. They closed up 52% at $20.75.
Many BKS shareholders have called for a sale of the Nook e-book business or the whole company.
The deal will allay investor concerns that B&N lacks the capital to compete in the e-book business. Barnes & Noble previously said it was weighing strategic options for its Nook business, including a possible spin-off or overseas expansion.
"It gives them a much larger partner with deeper pockets, it gives them increased reach," Morningstar analyst Peter Wahlstrom told Reuters. "In the last two years they've had their backs against the wall."
According to a statement Monday, Microsoft and B&N acknowledged they are exploring separating the subsidiary, provisionally dubbed "Newco," entirely from Barnes & Noble.
That could lead to a stock offering, sale or other deal.
BKS shares slipped Tuesday in morning trading to $19.95. MSFT was nearly unchanged at $32.29.
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