Why Barnes & Noble Shares Skyrocketed

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of book retailer Barnes & Noble (NYSE: BKS ) soared a dramatic 65% today on news that software gorilla Microsoft (Nasdaq: MSFT ) will invest $300 million in its Nook digital-book and college texts businesses.

So what: It's no secret that Barnes & Noble has struggled in the face of increasingly fierce digital competition, but today's massive infusion of capital will go a long way in easing its troubles. The deal finally creates a formidable third player in the e-reader space behind Apple and Amazon.com, and also gives Barnes & Noble the financial muscle to fight off increasingly frustrated activist shareholders in the process.

Now what: Microsoft will now have a 17.6% stake in a new subsidiary for the businesses named "Newco" in a transaction that values them at a whopping $1.7 billion. "Microsoft's investment in [the new subsidiary], and our exciting collaboration to bring world-class digital reading technologies and content to the Windows platform ... will allow us to significantly expand the business," Barnes & Noble CEO William Lynch said. But while there's no doubt that the deal breathes a whole lot of life back into Barnes & Noble, today's staggering surge -- likely perpetuated by frantic short-covering -- already seems to have priced in much of the upside.

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Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Motley Fool owns shares of Microsoft, Apple, and Amazon. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Amazon, as well as creating a bull call spread position in Microsoft and writing puts on Barnes & Noble. Try any of our Foolish newsletter services free for 30 days.

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