Microsoft will invest $300 million (£185 million) in a new Barnes & Noble subsidiary, which will include the digital Nook and College businesses of Barnes & Noble, the companies said in joint statement on Monday.
The formation of the new subsidiary and the relationship with Microsoft are important parts of Barnes & Noble's strategy to try to capitalise on the growth of the Nook business, it said.
The investment will give Microsoft a 17.6 percent equity stake, which values the unnamed subsidiary at $1.7 billion, according to the statement. Barnes & Noble will own the rest of the unit, which will still work with the company's retail stores, it said.
As part of the deal, Barnes & Noble and Microsoft have also settled their patent litigation, and moving forward, Barnes & Noble and the new subsidiary will pay Microsoft royalties for its Nook e-reader and tablet products.
Microsoft filed legal action against Barnes & Noble in March last year.
Barnes & Noble now intends to explore all alternatives for how a strategic separation of the subsidiary may occur, but there is no set timetable for when the review will be finished, it said.
One of the first results for users will be a Nook application for Windows 8. The app will extend the reach of Barnes & Noble's digital bookstore to devices based on Microsoft's upcoming Windows operating system, which will be used on both PCs and tablets. There is no date for when the application will arrive.