Skype deal is Microsoft's biggest purchase to date

Microsoft confirms $8.5bn acquisition of Skype

Microsoft has announced it will acquire Skype for $8.5 billion in cash.

Microsoft's interest in the money-losing but popular service highlights a need to gain new customers for its Windows and Office software, while competing with rivals such as Apple and Google.

Skype, which allows people to make calls at no charge but has also developed premium services, could be combined with Microsoft software such as Outlook to appeal to corporate users, while the voice and video communications could link to Microsoft's and Xbox LIVE gaming.

“Skype is a phenomenal service that is loved by millions of people around the world,” said Microsoft CEO Steve Ballmer.

“Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world.”

Skype, which has a monthly average of 145 million users, will support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices, and in turn Microsoft will connect Skype users with Lync, Outlook, Xbox LIVE and other communities.

It delayed plans for an initial public offering expected to raise $1 billion, with Facebook and Google touted as potential tie-ups in a deal valuing Skype at $3-$4bn.

Microsoft now will gain a foothold in the potentially lucrative real-time video and voice communications market as businesses look for lower-cost ways of communicating.

It would also have another route to develop its mobile presence, an area it has already put more energy and resources into as PC usage comes under threat.

Skype is set to become a new business division within Microsoft with Skype Chief Executive Tony Bates in charge and reporting directly to Ballmer, Microsoft said.

"It's a strategic asset and a defensive move," said BGC Financial analyst Colin Gillis. "If they can put it on Windows 8, it gives them an advantage. It helps them in the tablet market."

The Skype deal is the biggest in Microsoft's 36-year history, and some experts have expressed surprise at the $8.5 billion price tag.

Although the sum would not stretch cash-rich Microsoft, some said it was high for a company whose ownership has changed several times during its relatively short life.

"In this atmosphere of internet bubble 2.0, picking up an unprofitable online company for roughly 10 times sales probably seems downright cheap," Michael Clendenin, MD of consulting firm RedTech Advisors, said.

"But if you consider it was just valued at about $2.5 billion 18 months ago when a chunk was sold off, then $8.5 billion seems generous."

"It means Microsoft has a high wall to climb to prove to investors that Skype is a necessary linchpin for the company's online and mobile strategy," he added.

Skype, founded in 2003, was acquired by eBay in 2005 for $3.1bn, and then acquired by an investment group led by Silver Lake in 2009 for $1.9 billion in cash and a $125 million note. EBay retained about a third.

Last year it had in $860 million in revenue but posted a net loss of $7 million, according to data in its initial public offering filing.

"Microsoft and Skype share the vision of bringing software innovation and products to our customers," said Tony Bates.

"Together, we will be able to accelerate Skype's plans to extend our global community and introduce new ways for everyone to communicate and collaborate."

The acquisition is subject to regulatory approvals and other customary closing conditions, with required regulatory clearances expected to be obtained during the course of the calendar year.

Further reading:

See the E&T video on Inside Skype

Read the E&T feature on Inside Skype's Tallin HQ

Read more on Emerging Estonian Technologies

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