Shares of Barnes & Noble (NYSE: BKS ) soared more than 23% Thursday after a TechCrunch report revealed Microsoft (NASDAQ: MSFT ) may offer a $1 billion bid to buy the remaining stake it doesn't already own in the companies' joint Nook Media venture. Microsoft stock, for its part, ended the day lower by around 1%.
Remember, last year Microsoft invested $300 million for a 17.6% stake in the Nook business, which valued the segment at around $1.7 billion at the time. For those of you keeping track, that's nearly $400 million more than Barnes & Noble's current total market capitalization -- even after the pop.
What's more, the original agreement also included $180 million in revenue-sharing payments over the course of three years, and $125 million to help finance international expansion over the next five years, good for a total investment by Microsoft of $605 million.
Keeping that in mind, and knowing Mr. Softy likely hasn't spent all that extra dough yet since we're less than a year into the deal, their $1 billion buyout offer suddenly looks a whole lot less generous.
Here's the plan
So what, exactly, would Microsoft do with the Nook?
According to the report, the tech giant would be redeeming preferred units in Nook Media, including the segment's college book division, "leaving it with the digital operation -- e-books, as well as Nook e-readers and tablets."
In addition, apparently Nook Media had already formed plans to discontinue its Android-based tablet business by the end of its 2014 fiscal year -- a curious step considering many folks were just beginning to get excited that B&N last week finally decided to allow the Nook access to apps on the Google (NASDAQ: GOOG ) Play store.
Instead, Nook Media apparently wants to migrate to an all-digital model through which "Nook content is distributed through apps on 'third-party partner' devices." On the surface, at least, that seems like a great idea, as the low-margin hardware devices are currently harming Barnes & Noble's business at an ever-increasing rate. Besides, Barnes & Noble already told us back in February core comparable-store sales actually exceeded their own expectations by falling only 3.1%.
Barnes & Noble, then, would almost certainly be better off taking the $1 billion and running as far away as possible to focus on its existing core business.
If Microsoft ends up holding the bag, however, I'm afraid even after Nook Media isn't saddled by its low-margin hardware, it could still end up a horribly expensive failed experiment.
That's not to say anyone would blame Microsoft for being slightly peeved knowing the Nook largely relies on one of its largest mobile nemeses in the form of Google's Android OS, especially considering Microsoft's own awkward tile-based, smartphone-esque interface in Windows 8 has largely been perceived as a flop. As a result, it's probably safe to say those aforementioned "third-party devices" will at the very least include Microsoft's own struggling line of Surface tablets and laptop hybrids.
So who wins?
When all is said and done with the inevitable withdrawal of physical Nook tablets, you can bet Amazon.com and Apple will do all they can to grab what little market share the Nook controlled and steer it toward their own respective Kindle and iPad offerings.
In any case, keep in mind Microsoft's potential offer is far from a done deal, and it's quite possible it may not happen at all. In the end, regardless of which stock you own, I wouldn't get too excited about this news until the ink is actually dry.
More expert advice from The Motley Fool
It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.