Nook Tablet HomeMicrosoft and Barnes & Noble are teaming up for a new company that could have Amazon quacking in its boots today.

It was announced this morning that Microsoft has invested $300 million in a new company with Barnes & Noble that will temporarily be called “Newco.”   The new company involves Barnes & Noble’s Nook division and the bookseller’s educational college business.  The stake in the new company values it at $2 billion and gives Microsoft a 17.6 percent stake in the joint venture with B&N retaining the remaining 82.4 percent.

There had been rumors circulating back in January that Barnes & Noble was eyeing the possibility of spinning its Nook devices off into a separate company, but nothing manifested until now.  This technically still isn’t a spinoff, but it very easily could be down the road.

The elephant in the room now is if this means that the Nook will change from running the Android operating system to some version of Windows 8 once its released in the fall.  Microsoft has been touting how the latest iteration of Windows can run on computers as well as tablets, so it would seem a bit odd if a company it’s invested in was running a product from a competitor.

As for Amazon, it has been enjoying great success with its Kindle Fire tablet as well as its e-readers, and while B&N was doing well, it wasn’t much of a real threat.  With Microsoft now backing it, there may be a whole new fight brewing in the 7-inch tablet and e-reader markets.

This announcement very much came out of left field, it’ll be interesting to see how it develops in the comping days.

Barnes & Noble and Microsoft Form Strategic Partnership to Advance World-Class Digital Reading Experiences for Consumers

New York, NY and Redmond, WA (April 30, 2012) – Barnes & Noble Inc. (NYSE: BKS) and Microsoft (NASDAQ: MSFT) today announced the formation of a strategic partnership in a new Barnes & Noble subsidiary, which will build upon the history of strong innovation in digital reading technologies from both companies. The partnership will accelerate the transition to e-reading, which is revolutionizing the way people consume, create, share and enjoy digital content.

The new subsidiary, referred to in this release as Newco, will bring together the digital and College businesses of Barnes & Noble. Microsoft will make a $300 million investment in Newco at a post-money valuation of $1.7 billion in exchange for an approximately 17.6% equity stake. Barnes & Noble will own approximately 82.4% of the new subsidiary, which will have an ongoing relationship with the company’s retail stores. Barnes & Noble has not yet decided on the name of Newco.

One of the first benefits for customers will be a NOOK application for Windows 8, which will extend the reach of Barnes & Noble’s digital bookstore by providing one of the world’s largest digital catalogues of e-Books, magazines and newspapers to hundreds of millions of Windows customers in the U.S. and internationally.

The inclusion of Barnes & Noble’s College business is an important component of Newco’s strategic vision. Through the newly formed Newco, Barnes & Noble’s industry leading NOOK Study software will provide students and educators the preeminent technology platform for the distribution and management of digital education materials in the market.

“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,” said William Lynch, CEO of Barnes & Noble. “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 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,” said Andy Lees, President at Microsoft. “Our complementary assets will accelerate e-reading innovation across a broad range of Windows devices, enabling people to not just read stories, but to be part of them. We’re at the cusp of a revolution in reading.”

Barnes & Noble and Microsoft have settled their patent litigation, and moving forward, Barnes & Noble and Newco will have a royalty-bearing license under Microsoft’s patents for its NOOK eReader and Tablet products. This paves the way for both companies to collaborate and reach a broader set of customers.

Newco

On January 5, Barnes & Noble announced that it was exploring the strategic separation of its digital business in order to maximize shareholder value. Barnes & Noble is actively engaged in the formation of Newco, which will include Barnes & Noble’s digital and College businesses. The company intends to explore all alternatives for how a strategic separation of Newco may occur. There can be no assurance that the review will result in a strategic separation or the creation of a stand-alone public company, and there is no set timetable for this review. Barnes & Noble does not intend to comment further regarding the review unless and until a decision is made.