Microsoft  announced their plans to invest in Barnes and Noble Inc., the brick-and-mortar bookstore that also produces e-book readers and tablets in order to keep up with the digital age.

“The shift to digital is putting the world’s libraries and newsstands in the palm of every person’s hand, and is the beginning of a journey that will impact how people read, interact with, and enjoy new forms of content,” said Andy Lees, President at Microsoft. “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 at the cusp of a revolution in reading.”

Microsoft is investing $300 million in the company’s e-book business and college-texts. From the investment comes a new subsidiary, Newco, resulting in a 17.6% stake for Microsoft while B&N will still retain 82.4 percent ownership.  Newco is actually the digital subsidiary of Barnes and Noble, which the company is actively developing. The investment puts B&N’s valuation at $1.7 billion, an outstanding increase from their current value of $791 million.

“The formation of Newco and our relationship with Microsoft are important parts of our strategy to capitalize on the rapid growth of the NOOK business, and to solidify our position as a leader in the exploding market for digital content in the consumer and education segments,” said William Lynch, CEO of Barnes & Noble. “Microsoft’s investment in Newco, and our exciting collaboration to bring world-class digital reading technologies and content to the Windows platform and its hundreds of millions of users, will allow us to significantly expand the business.”

The investment would also result in a Nook tablet built on Windows 8.  Microsoft plans on selling computers and tablets equipped with Windows 8 by the end of the year in time for the holiday rush.

An unlikely  partnership

The Microsoft-B&N partnership is quite a surprise since the two battled it out in patent court when Microsot sued B&N for allegedly “violating their patents, covering a broad range of functionality, including ‘interacting with documents and e-books’ and ‘natural ways of interacting with devices by tabbing through various screens.’”

Their patent dispute was still active in February of this year.  Barnes and Noble was appealing to the U.S. International Trade Commission to dismiss the case filed against them.

As per the announcement, the two have already settled their patent dispute and Barnes & Noble and Newco will have a royalty-bearing license under Microsoft’s patents for their NOOK eReader and Tablet products. The settlement paves a way for both companies to collaborate and reach a broader set of customers.