Shares of Barnes & Noble (BKS) soared Monday morning after the book retailer announced that it would spin off its digital and college businesses into a new subsidiary. Microsoft (MSFT) will invest $300 million in the new division, giving it a 17.6 percent stake in the venture. The Daily Ticker's Daniel Gross and Henry Blodget discuss the deal in the accompanying video, and both are dubious that the new business will be successful.
"The desperate got married to the hopeless," Dan quips.
"My guess is that this is rearranging deck chairs," Henry notes.
The past few years have been tough ones for bookstores. Borders closed hundreds of stores last year as the company filed for Chapter 11 bankruptcy protection. Cheaper book prices from online competitor Amazon.com have significantly cut into Barnes & Noble's profits. The company's Nook reader, which debuted in 2009, is not as popular as Amazon's Kindle. The company's college-texts unit has shown signs of growth but that model has the potential to become anachronistic as more students buy and rent textbooks on e-readers and tablets.
Barnes & Noble values the new venture, which has yet to be named, at $1.7 billion — far more than the company's $791 million market capitalization. As part of the deal, a Nook application will be included in the Windows 8 operating system, which is expected to hit store shelves this summer. As Henry and Dan point out, the staid bookstore separated its most attractive and lucrative part from its aging and suffering brick-and-mortar business. Wall Street seemed to approve of the deal but whether the new subsidiary can compete in the increasingly cutthroat digital world remains unclear. Amazon's Kindle tablet maintains a firm grip in the e-book sphere, controlling 60 percent of the U.S. market versus Barnes & Noble's 30 percent share.
"Wall Street loves new things," Dan says. "This is larger theme of financial engineering for big box retailers."