Microsoft to get Skype for $8.5bn

Microsoft plans to buy internet phone service Skype for $8.5-billion, a rich price as it seeks to regain ground against growing rivals such as Google.

Microsoft's interest in the money-losing but popular service highlights its need to gain new customers for its Windows and Office software. Skype has an average of 145million users a month and has gained favour among small businesses.

Skype delayed plans for an initial public offering, expected to raise $1-billion. It has also been looking at other options, including a tie-up with Facebook or Google. Such a deal would have valued Skype at $3-billion to $4-billion.

The Luxembourg-based company, which allows people to make calls at no charge but has also developed premium services, would give Microsoft a foothold in the potentially lucrative video-conferencing market.

Skype could be combined with Microsoft software such as Outlook to appeal to corporate users, and its voice and video communications technology could link to Microsoft's Xbox live gaming.

In the longer term, Skype would offer Microsoft another route to developing its mobile presence, an area into which it has already put more energy and resources.

Skype is likely to become a new business division within Microsoft, with Skype CEO Tony Bates in charge and reporting direct to Microsoft CEO Steve Ballmer.

"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 the 36-year history of the world's biggest software company. It was first reported late on Monday by tech blog GigaOM.

The $8.5-billion price tag was a surprise. Though the sum would not stretch cash-rich Microsoft, some said it was high for a company whose ownership had 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, managing director of Shanghai consultancy RedTech Advisers, said.

"But if you consider [it] was valued at about $2.5-billion only 18 months ago, when a chunk was sold off, then $8.5-billion seems generous and means Microsoft has a high wall to climb to prove to investors that Skype is a linchpin in the company's online and mobile strategy," he said.

Skype, which was formed in 2003, was bought by eBay in 2005 for $3.1-billion. Last year it had $860-million in revenue, but posted a net loss of $7-million, according to data in its initial public offering filing.

In 2009, eBay sold a majority stake in Skype to an investor group including Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz for $1.9-billion in cash and a $125-million note. eBay retained about a third.