Microsoft Finds Its Nook

Up in Redmond, the wonderful news is
That the e-reader Microsoft chooses
Has growth of a type
That pays more than Skype,
Or that search engine nobody uses.

Microsoft announced a $605 million investment in Barnes & Noble's Nook e-reader business, in a deal that injected new life into the bookseller and may do the same for the software giant in the future. The deal gives $MSFT 17.6% of a new $BKS subsidiary that includes both the e-book division and the company's 641 college bookstores; it also values the subsidiary at $1.7 billion, twice as much as the parent's closing price on Friday. As a result, Barnes & Noble shares surged 52% on the news.

The Nook division will use its new war chest to build out an international expansion to rival that of Amazon's Kindle, the dominant player with 60% of the e-book market vs. Nook's 27%. Microsoft gets access to a fast-growing business to diversify beyond its dominant position in the more mature software business. Windows and Office still make up 85% of the company's revenue. Previous diversification attempts have comprised bigger investments that did not contribute much to the bottom line, including the $8.5 billion purchase of Skype, a Windows phone arrangement with Nokia, and the unsuccessful Bing search engine in partnership with Yahoo.