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Nook Simple Touch - Microsoft invests in Barnes & Noble

How much is Microsoft afraid of Amazon and its surging Kindle business? Enough to invest $300 million in Barnes & Noble’s new Nook subsidiary.

The deal, announced today, will give Microsoft a significant stake in an established e-reading company, a market where it hasn’t yet made much of an impact. Barnes & Noble hasn’t yet decided on a name for the subsidiary, which will also include the company’s College business segment, but we expect it to harken back to the Nook brand somehow. Microsoft will own 17.6 percent of the new company, which is valued at $1.7 billion.

Notably, the company is valued significantly higher than B&N itself this morning, which now has a market cap of $823.4 million. Shares of B&N were up a whopping 85 percent in pre-market trading at the time of this post.

Not surprisingly, one of the first products from the deal will be a Nook application for Windows 8. That’s something B&N would have likely developed anyway, but with Microsoft’s banking it’ll be able to accelerate development and take advantage of the new tablet features of Windows 8.

The partnership also resolves an ongoing patent dispute between the two companies, according to today’s release: “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.”

The inclusion of B&N’s higher education business also gives Microsoft a gateway into that potentially lucrative market. The subsidiary will push forward B&N’s Nook Study software to deliver digital education goods — which could potentially remove the need for expensive textbooks.

At the moment, it appears this new subsidiary will remain under Barnes & Noble. But it’s not hard to see the pieces being put in place for a larger shift down the line, which could include spinning off the subsidiary entirely, and a potential purchase by Microsoft.

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