Microsoft will invest $300 million for its stake in the new unit, which will be a Delaware limited liability company. Its name has not been decided.
Barnes & Noble will own about 82.4 percent of the business, which will continue to tap the resources of Barnes & Noble's bookstore chain, the largest in the United States.
The deal with Microsoft gives new fire power to Barnes & Noble, which has been engaged in an expensive battle with Amazon.com's market-leading Kindle.
"It gives them a much larger partner with deeper pockets, it gives them increased reach," said Morningstar analyst Peter Wahlstrom. "In the last two years they've had their backs against the wall."
Barnes & Noble has said it commands about 27 percent of the U.S. market for e-books and e-readers.
The company said in January that it might spin off its digital business, which includes its Nook e-reader.
The company did not say if it would take the new unit public.
The companies will introduce an application for the Nook on Windows 8, the upcoming version of Microsoft's operating system.
Barnes & Noble is investing heavily to develop its popular Nook devices and the e-book sales they generate as readers move away from traditional books.
Barnes & Noble and Microsoft have settled their patent litigation, the companies said.
Shares of Barnes & Noble soared 92 percent to $26.32 in premarket trading. The company was valued at just above $823 million at Friday's close.
Microsoft shares rose 0.7 percent to $32.19.
(Additional reporting by Martinne Geller in New York and Mihir Dalal in Bangalore; Editing by Lisa Von Ahn and Maureen Bavdek)
Reuters
