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Can Microsoft Rescue Barnes & Noble Now, Like it Did Apple in 1997?

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Back in 1997, Microsoft (MSFT) invested $150 million in Apple (AAPL) when its back was against the wall. Today, Microsoft announced it would invest twice that amount in Barnes & Noble (BKS) to make a Windows 8 version of its Nook e-book reader.

Before analyzing Microsoft's latest investment, it's worth remembering why it took a piece of Apple 15 years ago. Back then, Apple was struggling with low market share and years of weak leadership. Microsoft was looking to ensure that Apple would "develop and ship future versions of its Microsoft Office, Internet Explorer, and development tools for the Macintosh," according to CNET.

Not only that, but the two companies then announced that they were working out a settlement to patent litigation "over whether Microsoft's Windows operating system infringes on any of Apple's patents."

Moreover, on news of that announcement, Apple stock -- which had been trading at about $19.75 a share, popped about 40%. Back in 1997, Apple had about $7 billion in sales and a net loss of $1 billion, according to its 1998 10K.

But Apple seems to be doing better now with $108 billion in sales and $26 billion in net income. If Microsoft had held on to the roughly 8 million Apple shares it bought -- accounting for 2:1 stock splits in 2000 and 2005 -- they'd be worth about $19.3 billion -- a 38% compound annual rate of return.

As for Microsoft's deal with Barnes & Noble, the reasons for the investment -- selling more Microsoft products and settling patent litigation -- remind me of Mark Twain's saying that history doesn't repeat itself, but sometimes it rhymes. Barnes & Noble is making progress on its January announcement to spin off its digital and college businesses into a company now known as Newco.

Microsoft will own 17.6% of Newco so its $300 million investment values the entire spinoff at $1.7 billion, according to Reuters. The other 82.6% of Newco will be owned by Barnes & Noble.

Of course there is more to this deal than meets the eye since the patent litigation -- relating to allegations of infringing on NOOK intellectual property -- between Microsoft and Barnes & Noble has been settled. And I would not be surprised if this investment was related to the settlement.

The most obvious benefit of the $300 million from Microsoft's perspective is the expected development of a NOOK application for Windows 8 that will enable "hundreds of millions of Windows customers" to access the Barnes & Noble digital bookstore's catalogues of e-Books, magazines and newspapers, according to a company statement.

And Microsoft has a long way to go to gain any meaningful tablet market share. After all, a March 2012 IDC study showed that Apple shipped 15.4 million iPads in Q4; Amazon’s (AMZN) Kindle Fire debuted with 4.7 million units shipped with 16.8% of the market; Samsung had 5.5%; and Barnes & Noble dropped to 3.5% from 4.5% in Q3. Despite Bill Gates touting tablet computing in November 2000, Microsoft is not yet much of a player.

But Barnes & Noble is in deep yogurt and it does not look like there's much chance of Microsoft will yield an Apple-sized return on its investment. The beleaguered book store generated $5.7 billion in revenues and lost $11 million during the nine months ending January 2012, according to its latest 10Q.

And it burned through $32 million in cash during that period ending with about $27 million worth. And if it keeps burning through cash at this rate, it will run out within the year. So it's not a big surprise that Barnes & Noble's stock market value Friday was a mere $823 million -- half the value of Newco.

Expect Barnes & Noble shares to pop on this news -- they were up 91% in pre-market trading. But there is no way that Barnes & Noble is going to turn around as Apple did after Microsoft invested when it was down in the dumps in 1997.

The missing ingredient at Barnes & Noble is the business genius of Steve Jobs.