Microsoft, Barnes & Noble Ready for Battle

By Maxwell Fisher - May 3, 2012 | Tickers: BKS, MSFT | 0 Comments

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The most recent comment and, perhaps, investor sentiment, has been that Microsoft (NASDAQ: MSFT) and Barnes & Noble (NYSE: BKS) should each be relegated to the dust bin of past history.  This is said to be the fate of Microsoft because of its core, the operating system for the Personal Computer.  It must go the way of the dying PC.  Never mind that PC sales are up and last year's downturn is easily explained away by what's been happening in Europe, natural disasters in Asia, and the realization that recent assertions by Tim Cook, the newly minted CEO at Apple, suggesting that the downturn continues are over exuberant. Never mind that Microsoft will launch its new Windows 8 this year and that, in all likelihood, it will be as huge a success as most of its product launches in the past.

This dust bin is said to be the fate of Barnes & Noble as well, because its book barns are becoming less than noble as each eDay passes to wear them down into slummy obsolescence.  Witness the bankrupt Borders, and other bygones of venerable brick and mortar mien such as Kroch's & Brentano's, and Crown Books.   Ignore the Nook, they say, even though it has competed well--the commentators would add 'surprisingly--with the single purpose Kindle of AMAZON, that other single purpose purveyor, and each with the multi-purpose iPad of Apple, that communications generalist.

However, it is my opinion that the prospects of both Microsoft and Barnes & Noble, and therefore the potential for positive commentary about them, grew hugely with the joint announcement that Microsoft will venture into the NOOK of Barnes & Noble there to gird itself for tilt with Apple and Amazon, those two most formidable giants of the eBook Plain.  As only one commentator's negative warrants parallel of Microsoft to Don Quixote, of his quest with the noble Sancho Panza in the form of Barnes & Noble for the impossible dream of their past glories, perhaps, investors may flock to both.  In the interim, of course, the noble short sellers will pour from their barns to salvage what they can of their negativity and that will raise Barnes & Noble's stock price in the short term. That began on the day of the joint announcement.  Perhaps, it ended then too.      

As outlined in Barnes & Noble's 8-K (Microsoft has yet to file its), this is not a simple purchase of shares by Microsoft as suggested by some.  There may be many a slip between the cup and the lip before the quaff is consummated, if at all.  That said, it is unlikely that either Barnes & Noble or Microsoft will put down the chalice.  Rather, each needs the other if either is to progress toward past glories.  To do that, they need to take up the challenge and sally forth together.  The alternative is further tilting at wind mills rather than taking Apple and Amazon head on.  At the moment, though, there is no mount, neither Rosinante nor Pancho's nameless donkey, just a name, NewCo, provision for which is set forth in an investment agreement among three entities: Barnes & Noble, Microsoft and Morrison Investment Holdings, designated the Investor.  Pursuant to that agreement, Barnes & Noble is to saddle up a nameless donkey as NewCo, a Delaware limited liability company.  As there are several corporations and LLC's with NewCo in their name in the lists of the Delaware Secretary of State, a less generic name--perhaps the celebrated steed reckoned by Quixote superior to Alexander' Bucephalus and the Cid's Bavieca-- will likely be designated in the process of formation.  It is unlikely that the naming will be a deal stopper.  After that the Nook is to be contributed as well as the digital content and college bookstore businesses.  The Investor will then purchase, 300,000 convertible preferred membership interests created by NewCo to be designated Series A Preferred for $300 million.       

So far Microsoft does not appear upon the plain of battle, except in a  commercial agreement between it and Barnes & Noble which will obligate NewCo to develop and distribute a Windows 8 application for e-reading and digital content purchases. It will also obligate the company to enter into an intellectual property license and settlement agreement with Microsoft and Microsoft Licensing GP, a Nevada general partnership.  What is to be settled is an investigation which Microsoft instituted against Barnes & Noble in the U.S. International Trade Commission seeking to forbid entry and prohibit importation of certain devices alleged to infringe certain Microsoft patents.  But none of this need occur until February 3, 2013, according to the agreements, despite the obvious typographical error at page 4 of the Form 8-K filed with the Securities and Exchange Commission which misidentifies the closing as having occurred by the February 3^rd immediately past.          

If this transaction goes forward, it should as soon as possible. There should be no waiting until February 3, 2013.  Despite all the complex terms of the agreements, the transaction is not really that complex. I would hesitate to say that time is running out, but while Microsoft and Barnes & Noble are adjusting their saddles and donning their battle gear, Apple and Amazon are tearing ahead. Google is ever on the move too.  And who knows what the brick and mortar book sellers will be doing in desperation just to stay alive in the interim and for what they must hope is the long haul ahead? There is no time to waste.  Meanwhile, Barnes & Noble's stock has settled half-way back from where it soared the day before.  And as usual, Microsoft keeps plugging along like an old war horse, not rising to high, nor falling too low, just posting at a slow trot. 

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