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Barnes & Noble, Microsoft ink $300M deal on e-reading

The software giant will invest $300 million in a new Barnes & Noble subsidiary, giving it a 17.6 percent equity stake in the company. The Nook digital bookstore will be bundled with Windows 8.

Barnes & Noble's Nook devices.
Barnes & Noble's Nook devices. Sarah Tew/CNET

Barnes & Noble and Microsoft at one time couldn't get along. Now, they're partners.

The companies announced today that Microsoft has invested $300 million into a new Barnes & Noble subsidiary, known as Newco until the company can come up with a name. The $300 million investment will give Microsoft a 17.6 percent equity stake in the firm. Barnes & Noble, which assumed a $1.7 billion valuation on the subsidiary, will retain 82.4 percent ownership.

Newco will combine Barnes & Noble's digital and college businesses, meaning the retailer's Nook operations and its Nook Study software for students and educators will be a part of the undertaking.

As part of this deal, Barnes & Noble will include its Nook digital bookstore with Windows 8, the next generation of Microsoft's operating system, which launches later this year. In addition, the companies have settled all of their patent litigation related to use of Android on the Nook tablet, and have formed a "royalty-bearing license under Microsoft's patents for its Nook e-reader and Tablet products."

The partnership between Microsoft and Barnes & Noble is a rather surprising one. For over a year, the companies have been battling in the courts, with the software giant accusing Barnes & Noble of patent infringement. Barnes & Noble has responded with venom, saying that Microsoft was misusing patent law for its gain, and last year went as far as asking the Justice Department to investigate the Windows maker.

"Microsoft is attempting to raise its rivals' costs in order to drive out competition and deter innovation in mobile devices," Barnes & Noble lawyer Peter T. Barbur wrote in an October 17 letter to Gene I. Kimmelman, the chief counsel for competition policy in the Justice Department's antitrust division. "Microsoft's conduct poses serious antitrust concerns and warrants further exploration by the Department of Justice."

Barnes & Noble is among a host of companies that have been targeted by Microsoft for their use of Android. The software company argues that Android violates patents it holds, and has inked a slew of licensing deals with vendors. Barnes & Noble had been one of the few companies attempting to battle it out.

Although the Microsoft-B&N deal is surprising, the bookseller's decision to spin off its Nook unit isn't. Back in January, the company released a statement saying it was exploring the possibility of spinning off the operation so it could "unlock" the value of the Nook unit. In today's statement, Barnes & Noble said that Newco is still a work in progress, adding that it can provide "no assurance that the review will result in a strategic separation or the creation of a standalone public company."

Regardless, Barnes & Noble investors couldn't be more pleased. The company's shares are up a whopping 83 percent to $25 in pre-market trading.

This story has been updated throughout the morning.