Microsoft is challenging Amazon's dominance of the e-book market by investing $300m in Barnes & Noble's Nook reader and university textbook businesses.
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News of the deal sent shares in Barnes & Noble up 76% to $24.09 in US morning trading on Monday, according to the Guardian. Microsoft's stock was also up, but by just two cents to $32.
The plan is to set up a joint subsidiary that could eventually be spun off with Microsoft to own 17.6% of the equity.
The deal ends a number of lawsuits between the two companies and includes plans by Microsoft to include a Nook reader application in Windows 8 due to be released later this year.
A Nook application for Windows Phone is sure to follow, but Barnes & Noble has indicated that Nook will continue to be available on competing devices, such as Apple's iPhone.
Analysts said the inclusion of the application in Windows 8 will give the Nook reader a major boost, improving is ability to compete with Amazon's Kindle, which holds about 60% of the market.
Nook accounts for just 25% of the US ebook market, but Barnes & Noble dominates in university textbooks for e-readers.