Microsoft Corp. (MSFT) confirmed plans to buy Internet phone company Skype Technologies SA for $8.5 billion in cash--the most aggressive move yet by Microsoft to play in the increasingly-converged worlds of communication, information and entertainment.

Buying Skype--a service that connects millions of users around the world via Internet-based telephony and video--would give Microsoft a recognized brand name on the Internet at a time when it is struggling to get more traction in the consumer market.

"Skype is a phenomenal service that is loved by millions of people around the world," Microsoft Chief Executive Steve Ballmer said. "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 will become a new business division within Microsoft, and Skype CEO Tony Bates will assume the title of president of the Microsoft Skype division, reporting directly to Ballmer.

The companies didn't close disclose what portion of the deal includes debt, but The Wall Street Journal reported the equity portion of the deal would likely be worth $7 billion to $8 billion.

Microsoft shares slipped 0.9% to $25.59 in premarket trading and are down 6.1% in the past three months.

Microsoft has invested heavily in marketing and improving the technology of its Bing search engine. While it has made some market share gains over the past year, Google Inc. (GOOG) still dominates the search market with more than 65% of U.S. searches going through its site.

The Skype deal ranks at or near the top of the biggest acquisitions in the 36-year history of Microsoft, a company that traditionally has shied away from large deals. In 2007, Microsoft paid approximately $6 billion to acquire online advertising firm aQuantive Inc. Many current and former Microsoft executives believe Microsoft significantly overpaid for that deal. But they are also relieved that Microsoft gave up on an unsolicited $48 billion offer for Yahoo Inc. (YHOO) nearly three years ago. Yahoo is valued at half that sum today.

The deal shows how far Skype has come since it was launched in 2003 by Niklas Zennstrom and Janus Friis, two men who had created a file-sharing technology called Kazaa that became widely associated with music piracy. While Skype was initially popular with techies, it increasingly worked its way into the mainstream by offering free or cheap phone calls which were especially appealing to international callers.

When eBay Inc. (EBAY) purchased the company in 2005 for $2.6 billion in cash and stock, Skype was regarded as something of an experiment in which eBay's buyers and sellers would use the service to communicate about potential transactions.

The experiment faltered, and eBay gave up on Skype in 2009, selling a 70% stake to a group of technology investors including Silver Lake Partners, venture capital firms Index Ventures and Andreessen Horowitz, and the Canada Pension Plan Investment Board, who will make a handsome return on the Microsoft transaction.

For all its promise, Skype has had a mixed history as an operating business. It has produced little net profit in the eight years since it was founded. Profits continue to remain elusive as the company expands its business world-wide. Last year the company posted revenue of $860 million and $264 million in operating profits, but still had a loss of $7 million. The company had $686 million in long-term debt as of Dec. 31.

Skype uses a technology called voice over Internet protocol, which treats calls as data like email messages and routes them over the Internet, rather than a traditional phone network. Skype's software, which can be downloaded free, allows users to call other Skype users on computers or certain cellphones for free. Skype users can also call land lines for a fee and conduct video calls.

Skype could play a role in Microsoft's effort to turn around its fortunes in the mobile-phone market, an area where it has lagged badly behind rivals Apple and Google. The company last year launched a new operating system for mobile phones known as Windows Phone 7 that has been well reviewed by technology critics but hasn't yet meaningfully improved Microsoft's market share.

Last August, Skype filed documents to go public but put its IPO plans on hold after bringing in a new chief executive, Tony Bates.

--Anupreeta Das, Nick Wingfield and Spencer E. Ante of The Wall Street Journal contributed to this article.

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One Response so far.

  1. ka bute says:

    is this true? omg. microsoft sucks! haha.

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