In a world where iPads, Kindles and all kinds of different e-readers are becoming more prevalent, Microsoft has decided to boost the likes of Barnes & Noble’s Nook product. Microsoft is investing $605 million into the product in hopes of becoming a more competitive player in the market.
In return for their capital, Microsoft is receiving a 17.6 percent stake in the company, which includes the e-book and college bookstores divisions.
This negotiation has been incredibly generous to Barnes & Noble and their shareholders. Just this past Monday, the stock saw a tremendous gain of 52 percent, which rose the price to $20.75 per share.
Barnes & Noble has struggled over the past few years, and this closing price was the highest that was seen in the past two years. So perhaps this stock has done a lot in one day, but will it see any future returns?
The Nook has several possible objectives in mind which, if successful, may create benefits for the stock. Barnes & Noble, as part of the agreement, will create a Nook reading app for Windows 8.
By doing so, the Nook product exposes itself to a whole wave of customers who might not have access to it without the app. This opens up more potential sales of e-books and more revenues for Barnes & Noble.
On a recent measure of 2012 market share for e-books, Barnes & Noble stacks up at an impressive 27 percent.
However, they are trailing far behind Amazon, who has claimed 60 percent of the market share.
With a bit of help from Microsoft and its capital injection, there is a possibility of the Nook closing this gap. Time will tell if this will become a reality, but the company believes it has a strong product.
With projected e-book revenues lining up to be approximately $3 billion in 2012, and doubling to $6 billion in 2014, it is needless to say that conquering a bit more of this market share would lead them to massive profits.
The stock may also have a higher intrinsic value than it is currently trading at. Barnes & Noble’s market cap was just $800 million earlier, and after its deal with Microsoft, the valuation rose to $1.7 billion.
Even after the large gain on Monday, Barnes & Noble’s market cap is sitting at $1.2 billion which means even more potential upside is probable.
All in all, this deal looks like it has some great potential for Microsoft and Barnes & Noble. However, as confident as ownership may be, they must simply wait and see how smoothly the process goes.
James McQuivey, an analyst at Forrester Research Inc. believes, “They each have what the other needs to be successful-if they can do it right.”