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Microsoft Is Asking for Pain

By Evan Niu, CFA – May 9, 2013 at 12:00PM

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The software giant is reportedly looking to buy the Nook business from Barnes & Noble. Unfortunately, Nook doesn't have a lot going for it right now in terms of either hardware or content. What does Microsoft want?

Desperate times call for desperate measures.

Almost exactly a year ago, Microsoft (MSFT 1.75%) and Barnes & Noble (BKS) announced that they were forming a strategic partnership in the bookseller's Nook business. In exchange for $300 million, Microsoft would get a 17.6% stake in the newly formed subsidiary of B&N, valuing it at $1.7 billion.

The deal was part of a settlement between the two companies, since Microsoft had been hounding Barnes & Noble over Google (GOOGL 1.84%) Android-related royalties. B&N would release a Nook application for Windows 8, and Microsoft would get more exposure to the tablet market.

Well, the Nook business ain't doing so hot right about now. Barnes & Noble effectively just surrendered its tablet ambitions to Google by embracing the officially sanctioned Android ecosystem. In doing so, B&N is implicitly throwing in the towel with trying to operate its own separate content ecosystem, opting for the easy way out by adding Google Play and all of Google's most popular services to its Nook lineup.

Barnes & Noble admitted last quarter the Nook unit sales were weak, driving the segment's revenue down 26%. The bookseller has launched various promotions to clear out inventory.

TechCrunch now reports that Microsoft is contemplating buying out the entire Nook business from B&N, which would inevitably result in nothing but pain. Some internal documents say that Microsoft may offer $1 billion to buy the digital assets of the Nook subsidiary, and that Nook hardware sales are to be shuttered by the end of fiscal 2014, in line with a New York Times report in February.

Instead, Nook would transition toward becoming a content platform for third-party devices, which makes absolutely no sense strategically in the context of adopting Google Play. It's like saying, "Our content ecosystem is doing terribly, so we're giving up, but let's do our own content ecosystem!"

The leaked docs reportedly value Nook at $1.66 billion. In December, publisher Pearson bought in to Nook for $89.5 million, enough to grab a 5% stake that valued Nook at $1.8 billion. These are the current owners and their current stakes in Nook.



Barnes & Noble






Source: Barnes & Noble.

What "digital assets" could Microsoft possibly be interested in? The content side clearly isn't doing well. Microsoft has its own Windows Store and Xbox Live content storefronts. Nook hardware sales are dropping, while Microsoft is ramping up Surface. Overall, the Nook brand isn't particularly powerful, either.

Hasn't Microsoft learned its lesson with overpaying for dubious acquisitions?

Fool contributor Evan Niu, CFA, has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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