Yesterday, software giant Microsoft (Nasdaq: MSFT) announced a $300 million investment in Newco, a subsidiary created under the banner of bookstore operator Barnes & Noble (NYSE: BKS). The investment gives Mr. Softy a 17.6% ownership stake in Barnes & Noble's college bookstores and digital publishing operations. But let's call a spade a spade: This move is all about the Nook e-book reader.
You get what you pay for. Right?
This investment puts a $1.7 billion valuation on the Nook-centric section of Barnes & Noble. The bookstore's shares jumped as much as 105% on the news before retreating a bit. Even so, the entire company now holds a $1.2 billion market cap. With almost 10 times as much debt as cash on the books, Barnes & Noble's enterprise value is a bit larger at roughly $1.6 billion. Either way, that's far less than the implied value of the new digital operation.
Either the bookstores are worth less than zero, the markets have horribly mispriced Barnes & Noble, or Microsoft made a huge mistake here.
What's the point?
The first fruit of this relationship will be a Nook application for the Windows 8 platform. That sounds reasonable at first blush, but I think there's more to that new app than meets the eye.
Consider this: Barnes & Noble already provides a Nook reader package for today's Windows 7 machines. There are also Nook apps for Android smartphones and tablets, Apple Mac computers, the Apple iPhone, and -- count 'em -- two tailor-made iPad apps.
Windows 8 can run the old PC version. I'm sure the Windows 8 app will leverage the new Metro-style interface, making the Nook app look and feel like something from the newfangled Windows Phone world. But would that be a big enough deal to have both companies shouting from the rooftops?
I think not.
The real deal
Expect the Nook platform to gravitate closer to Microsoft from now on. After all, Redmond actually owns a good-sized slice of it.
Shutting iPad and Android support down altogether would not be a good idea, given their large market shares in the wild. You'd only end up chasing consumers away from the Nook altogether, either to Apple's iBooks or the Amazon.com (Nasdaq: AMZN) Kindle family. Microsoft didn't invest $300 million in the Nook just to kill it.
But the Windows 8 version should always be on the bleeding edge. New features and media formats will move slowly to other platforms. And I would not be surprised to see the next piece of Kindle hardware running Windows instead of Android. This is a sneaky way for Microsoft to seed its new software platform into the consumer market.
Will it help?
With this deal in hand, Microsoft now has two established brands operating like hyper-independent subsidiaries. The first one is, of course, phone maker Nokia (NYSE: NOK), which installed former Microsoft executive Stephen Elop as CEO and then swore allegiance to Windows Phone. The Nokia Lumia 900 handset is trying to pave the way for greater Microsoft exploits, but it could use a bit of help. So here comes the Nook to establish Windows as a workable tablet platform.
So there you go; Redmond probably approached Amazon first, but the Kindle is already doing great under the wing of a financially stable company. The Nook is a different story. Barnes & Noble is getting desperate and had to mortgage the Nook to give the entire company a new lease on life.
This Hail Mary just might work, too. I wouldn't bet the house on it, though. Microsoft doesn't exactly have a stellar track record in consumer electronics. Failures like the Zune and the old Windows Mobile smartphone platform seem more common than Xbox success stories. Mr. Softy might still find a way to turn the winning Nook into a loser.
Amazon can still help you retire rich. I don't know that a Microsoft-backed Barnes & Noble can make the same claim.
Editor's note: This article has been updated to correct the calculation of enterprise value. The Fool regrets the error.
