The Barnes & Noble Deal: Microsoft Scores Another Win-Win
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A lot has happened since the Barnes & Noble article written the first week in January. Certainly today’s announcement of a partnership with Microsoft to crank up the Nook business is getting all the headlines – as well it should. But that’s not the whole picture for the once beleagured book store.
The huge gains for Barnes & Noble (NYSE: BKS) shareholders comes on the heels of what now seems an almost paltry 18% jump early last week. That bump came after it was announced Jana Partners – a hedge fund well known for buying big stakes in companies and pushing for significant changes – bought nearly 7 million shares, upping its ownership to nearly 12%. The fact that investors took solace in the news that changes were on the horizon speaks volumes about Barnes & Noble management and the direction of the company.
Going back even further – and what makes the recently announced deal with Microsoft even more compelling – was the back and forth amongst both analysts and investors as to whether the Nook division should be spun off or not. Even the opponents of unlocking shareholder value via a separate company agreed something had to be done. Now it appears Barnes & Noble's management may have pulled off quite the coup – unlocking the aforementioned value estimated at about $1.6 to $1.7 billion total – without divesting itself of what is far and away the company’s most precious asset.
And let’s not forget those men and women up in Redmond. Microsoft (NASDAQ: MSFT) continues to impress with their aggressive moves, dipping their toes into previously unchartered waters. Sure they continue to crank out their bread-and-butter Windows systems and software we’ve all become accustomed to. But what is differentiating Microsoft right now – and making them an even more attractive investment option – are the company’s forays into other areas. Already focused on Cloud technologies and expanding their online offerings – the recently announced purchase of 800 or so patents from AOL is just one of many strategic moves.
The Mango OS being used in the Nokia Lumia smartphones will be applied to other mobile products before long, and now the partnership with Barnes & Noble gives Microsoft an opportunity to go head-to-head with Amazon (NASDAQ: AMZN) and the industry-leading Kindle eReader, as well as Google (NASDAQ: GOOG). Why Google? Because the Nook is currently run on the Android OS, Google’s industry mainstay. Will Barnes & Noble make the switch to the Windows 8 OS? That would be a big win for Microsoft, but even if that doesn’t happen, the company is clearly on board with the idea of making content readily accessible, and this is yet another step in the right direction.
A Few Specs
Microsoft’s $300 million buy-in will give the company a 17.6% interest in the soon-to-named subsidiary. Some quick math and investors realized the value of the new Nook subsidiary was more than Barnes & Noble as an entire company – something proponents of a spin-off have been saying forever. Not surprisingly the company has settled in at about $1.35 billion in market cap – or just about their share of the new alliance. Valuing the traditional book business lines at...nothing. Oh well, who's going to complain after a run-up like this?
Though Barnes & Noble is up around 75% in the past week (most today, of course), Microsoft still can’t seem to get any love – which is good news for those who haven’t gotten on board yet. Microsoft continues to be one of the best options for investors in need of an anchor for their portfolio. The growth opportunity is certainly there, and shareholders will also enjoy a little income in the form of the 2.5% dividend yield.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.
