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[Follow-up: Microsoft vs. Amazon? Plot thickens with Barnes & Noble pact]

Looking to jumpstart its upcoming Windows 8 operating system and bolster its position in tablet computers, Microsoft today announced a $300 million investment in Barnes & Noble’s Nook business unit. As part of the deal, Microsoft will take a 17.6 percent stake in the new subsidiary, which has yet to be named but is currently operating under the moniker Newco.

The new business will have a market value of $1.7 billion, and as part of the deal Microsoft and Barnes & Noble have resolved patent litigation over the use of Android in Nook tablets. The companies also said that a new Nook application wil be built on Windows 8 this year.

Microsoft sued Barnes & Noble over the use of Android in the Nook last March, saying at the time that companies “manufacturing and shipping Android devices must respect our intellectual property rights.” Later, a harshly-worded slide deck became public which detailed Barnes & Noble’s view of what they called Microsoft’s “anti-competitive behavior in the mobile operating system market.”

Obviously, these two companies have been at loggerheads in the past. But with today’s announcement those days appear to over.

Shares of Barnes & Noble are up more than five percent on the news, with the book seller now valued at $823 million. Interestingly, that’s about half of what the new e-reader unit is valued at.

The other interesting component to today’s news is what will certainly become a cross-town fight for market share in the e-reader and tablet market between Amazon.com and Microsoft.

It will be fun to have front row seats to that battle as this story unfolds. Stay tuned for more details.

Barnes & Noble announced in January that it plans to spin off its Nook business, and with today’s news that’s still a possibility. Obviously, Microsoft is now in the driver’s seat if it were to pursue an outright acquisition, bolstering its 17.6 percent stake.

In a conference call this morning, Barnes & Noble CEO William Lynch said that Microsoft was the “ideal partner” since few companies own more screens than the software giant.

“What this relationship allows us to do is work with one of the most respected technology companies that has been thinking a lot about digital reading, and … we are going to throw our technology and R&D into the mix, and they will throw theirs, and we think we’ll deliver consumer experiences in authoring, reading, consumption, publishing of content that few other companies will be able to deliver,” Lynch said.

Andy Lees

Microsoft president Andy Lees, meanwhile, called the deal a “multi-faceted agreement” that will help lead a digital reading revolution in which more and more people consume content through tablet computers.

“The opportunity here, though, is really about defining the future of reading,” said Lees. “And we think that we have a lot more to add than just being the platform provider. And that really is what this partnership enables us to do. We can look at the future of how people are going to read, how they are going to interact with those stories and how people are going to learn using these sorts of materials, and you will see blurring of different content types. We think that we can add a lot of value to those future scenarios, whether that’s creating those stories, whether that’s enjoying the stories or working with the Barnes & Noble store to enable the purchase.”

Here’s the full press release:

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.

Additional information will be contained in a Current Report on Form 8-K to be filed by Barnes & Noble.

Barnes & Noble and Microsoft will host an investor call and webcast beginning at 8:30 A.M. ET on Monday, April 30, 2012. To join the webcast, please visit: www.barnesandnobleinc.com/webcasts.

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