We started the week with the announcement that Microsoft (MSFT, NASDAQ, 52 week range 23.65 – 32.95) will be investing $300 million into Barnes & Noble (BKS, NYSE, 52 week range 9.35 – 26.00). Microsoft will own approximately 17 percent of Barnes & Noble’s new subsidiary, which consists of its Nook e-reader and college text books. Microsoft also has committed to financing an additional $60 million a year for three years in a revenue-sharing deal, and $25 million a year for five years to help finance the international expansion of the Nook.
Barnes & Noble is valuing the deal at about $1.7 billion. With Barnes & Noble’s market capitalization at $790 million at the close of the market on Friday, it resulted in shares spiking as much as 90 percent, to 26 per share and closing at 20.76, up 7.08, or 52 percent. Trading volume was at almost 29 million shares, compared to its average over the last three months of about 1.3 million shares.
And that is the real news in this deal. Investors had written off Barnes & Noble as they have done with RIMM (makers of BlackBerry), Nokia and few others. The short interest in Barnes & Noble shares (those betting on the downside) had gotten up to about 19 million of the outstanding shares, and with a float (shares available for free trading) about 19 million shares out of 58 million total shares, it caused a major “short squeeze,” with everybody running to the door at the same time trying to cover their short positions, buying back all the shares they had previously sold short. After it all shakes out, we will see how the market really feels about the deal.
For Barnes & Noble, it will get additional muscle in customer reach and finance to really compete in the tablet/e-reader market against Amazon’s Kindle Fire and Apple’s iPad. It will also give them access to Microsoft’s new Windows 8 operating system due out later this year. There is a lot of buzz around Windows 8, which has helped nive Microsoft’s shares up 23 percent, year-to-date.
The Nook competes more so with the Kindle Fire with a similar price point of about $199, opposed to the iPad at $499. Nobody is really sure, and Amazon won’t clearly say, but most feel that the Kindle Fire is sold at either a slight loss or breakeven. Are we going to see a price war as Barnes & Noble tries to garner market share? The Nook is currently at 30 percent market share in the US e-reader category.
Also, through the more traditional Barnes & Noble side, the Nook has just as much access to content (books, DVDs and magazines) as Amazon. It will be interesting how this all plays out. We will definitely see some action as the Christmas season approaches. Tablets were in big demand last year and expected so this year.
Excellent article with clear detail and analysis. Thanks for sharing.
Dwain H. HansenMOMENTUM Media3280 Beaumont WoodsHonolulu, HI 96822808-988-4131 MomentumMediaUS.com