Barnes & Noble Inc. said it will separate its digital and college book businesses into a new subsidiary, giving Microsoft Corp a 17.6 per cent stake in the new unit, and the bookstore operator's shares nearly doubled in premarket trading on Monday.
Microsoft will invest $300-million for its stake in the new unit, which will be a Delaware limited liability company. Its name has not been decided.
The companies will introduce an application for the Nook on Windows 8, the upcoming version of Microsoft's operating system.
Barnes & Noble is investing heavily to develop its popular Nook devices and the e-book sales they generate as readers move away from traditional books.
"Our complementary assets will accelerate e-reading innovation across a broad range of Windows devices, enabling people to not just read stories, but to be part of them. We're on the cusp of a revolution in reading," Andy Lees, president at Microsoft, said in a statement
Barnes & Noble will own about 82.4 per cent of the business, which will continue to tap the resources of Barnes & Noble's bookstore chain, the largest in the United States.
The deal with Microsoft gives new fire power to Barnes & Noble, which has been engaged in an expensive battle with Amazon.com's market-leading Kindle.
"It gives them a much larger partner with deeper pockets, it gives them increased reach," said Morningstar analyst Peter Wahlstrom. "In the last two years they've had their backs against the wall."
Barnes & Noble has said it commands about 27 per cent of the U.S. market for e-books and e-readers.
The company said in January that it might spin off its digital business, which includes its Nook e-reader.
The company did not say if it would take the new unit public.
Barnes & Noble and Microsoft have settled their patent litigation, the companies said.
Shares of Barnes & Noble soared 92 per cent to $26.32 in premarket trading. The company was valued at just above $823-million at Friday's close.
Microsoft shares rose 0.7 per cent to $32.19.
With a file from The Associated Press