Software developer Microsoft Corporation (MSFT) and bookseller Barnes and Noble (BKS) agreed to end the two-year commercial agreement related to the struggling Nook e-reader business.
Accordingly, Barnes & Noble will acquire Microsoft’s stake in the Nook digital books and device business for $62.4 million in cash and 2.7 million shares worth $54 million. Moreover, Microsoft will have no obligation to continue to fund related operating expenses per the previous terms and conditions. Also, Microsoft will gain about 22.7% of the total proceeds from Nook's digital business, which excludes the college bookstores, if it is sold in the coming three years..
Nook was launched in 2009 in an effort to carve a niche in the e-reader and tablet market but it saw limited success. In Apr 2012, Microsoft invested $300 million in the then fledgling business and made a commitment to put in another $305 million over the next five years In exchange, Microsoft got a 17% interest in the brand.
It would all have been worthwhile if the Nook had succeeded to unseat or at least challenge the dominant devices from Amazon’s, Apple's (AAPL) and Google's (GOOGL) Android. Not only did it remain insignificant in comparison to the leading devices, but Microsoft also came out with its own Surface tablet that did better than the Nook. Barnes & Noble too has been making losses for a while now, largely due to this business. So the business has just stopped making sense.
As a result, in June, Barnes & Noble announced that it will be separating its Nook business, which includes e-books, devices and accessories from its core retail business, which includes its book stores and BN.com. Barnes and Noble decided to separate the business after a fruitless search for a buyer despite rumors last year of a possible buyout by Microsoft.
The spin-off is expected to be complete at the end of Aug 2015 following which Barnes & Noble will be able to focus on software and content.
We believe that the termination of the pact will act as a tailwind for Microsoft, which has been throwing good money after bad. It will now enable the software developer to focus on its Surface tablet platform. Surface devices generated $908 million in revenues in the first quarter of fiscal 2015 (up from $409 million in the fourth quarter of fiscal 2014), driven by Surface Pro 3, which is seeing growing interest among users.
Microsoft is still not making money on its Surface devices and management expects the business to break even next year. In the meantime, it is sparing no means to succeed.
Microsoft shares carry a Zacks Rank #3 (Hold).
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