Peter Kafka

Recent Posts by Peter Kafka

Barnes & Noble Spins Off Nook, With Help From Microsoft (Updated)

Barnes & Noble is breaking itself apart, by spinning off its fast-growing digital unit from its slow-growth bookstore business. And it’s doing so with help from Microsoft.

Redmond will put $300 million into the new business at a $1.7 billion valuation, and will get 17.6 percent of the new company. That will leave Barnes & Noble with a stake in the new unit worth about $1.4 billion.

That’s nearly $600 million more than the value the market placed on all of Barnes & Noble until today. Not surprisingly, Barnes & Noble investors love this idea, and are bidding up the stock a staggering 80 percent this morning.

(Update: For now, this isn’t a formal spinoff, and the new unit will remain a Barnes & Noble subsidiary. It’s reasonable to assume that Barnes & Noble and Microsoft will attempt to formally cleave the digital unit into a standalone company down the road, though the release announcing the deal includes plenty of hedging language in case that doesn’t happen: “The company intends to explore all alternatives for how a strategic separation of Newco may occur. There can be no assurance that the review will result in a strategic separation or the creation of a stand-alone public company, and there is no set timetable for this review.”)

A few details:

  • The new company will also include Barnes & Noble’s college book-selling unit.
  • Microsoft’s upcoming Windows 8 OS will now include a Nook app.
  • The deal includes a settlement to a patent battle between the two companies. It’s worth noting that the Nook runs on a “forked” version of Google’s Android mobile operating system.

The deal is a bit of a magic trick for Barnes & Noble, which will manage to extract an extraordinary amount of value from a business that didn’t exist a few years ago — and will now have a currency to help it compete for Silicon Valley talent.

Meanwhile, Microsoft, which had completely ceded the e-reader market to Amazon, Apple and everyone else, gets into the business via a very small investment.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik