The deal could make Barnes and Noble's Nook e-book reader available to millions of new customers, integrating it with the Microsoft's new Windows 8 operating system.
The as-yet unnamed new company will be 82.4% owned by Barnes and Noble, with Microsoft getting a 17.6% stake.
It will house the bookseller's digital and college education book businesses.
Bricks and mortar
But some industry commentators believe publishers will be "terrified" at the implications of the deal.