Microsoft To Buy Skype For $8.5 Billion

Microsoft Corp plans to buy Internet phone service Skype for $8.5 billion in its biggest-ever acquisition, placing a rich bet on mobile and the Internet to try to best rivals such as Google Inc.

In a deal that took a month from offer to signing, the software company outbid Google and Facebook, which sources said offered to partner or buy Skype for $3 billion to $4 billion.

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

But investors expressed skepticism over the deal, sending Microsoft shares down 0.62 percent to $25.67. If those losses hold, the software giant's market value -- already exceeded by Apple Inc last year -- will slip behind General Electric Co's and begin to approach IBM's.

Led by private equity firm Silver Lake, eBay Inc and other investors including the Canada Pension Plan Investment Board and Andreessen Horowitz, would make $5 billion, or three times their investment, a source familiar with the deal said.

Microsoft is putting more energy and resources into mobile and the Internet as the personal computer business underpinning its Windows and Office franchise appears to be under threat.

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 video-conferencing market as businesses shift to cheaper ways of communicating.

Skype delayed plans for an IPO that was expected to value the company at more than $3 billion. It looked tie-ups with Facebook and Google. Such a deal was expected to value Skype at $3 billion to $4 billion.

"It doesn't make sense at all as a financial investment," said Forrester Research analyst Andrew Bartels. "There's no way Microsoft is going to generate enough revenue and profit from Skype to compensate."

A MOBILE PRESENCE

Skype 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 Xbox live gaming.

Skype also would offer Microsoft 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 would become a new business division within Microsoft with Skype CEO Tony Bates in charge and reporting to Ballmer.

"Tony didn't look for it. The ownership group, led by Silver Lake, didn't look for it. We just decided (it was) something that we thought made sense for us," a jubilant Ballmer told reporters.

The sum would not stretch Microsoft. It would bankroll the deal with cash sitting overseas, which would be taxed if Microsoft brought it home. But others said the price was high.

"In this atmosphere of Internet Bubble 2.0, picking up an unprofitable online company for roughly 10 times sales probably seems downright cheap," said Shanghai-based Michael Clendenin, managing director of consulting firm RedTech Advisors.

"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 and 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 said.

Skype, which was formed in 2003. EBay Inc bought it in 2005 for $3.1 billion. Last year, it lost $7 million, according to data in its initial public offering filing.

In 2009, eBay sold a majority stake in Skype for $1.9 billion in cash and a $125 million note. EBay retained about a third.

Ballmer said his company did not use Wall Street advisers on the deal, approaching the owners directly. Goldman Sachs and JPMorgan advised Skype.

The deal, the biggest in technology so far in 2011, capped the strongest start to deal-making since 2000, according to Thomson Reuters data. (For a graphic on technology deals, click here: r.reuters.com/vev49r)

"I wish they had not done it," said Whitney Tilson, founder and a managing partner of T2 Partners LLC, which owns Microsoft shares. "Everybody I know uses it and I am glad Microsoft owns it. They just probably paid too much for it."

"We aren't big enough to have a big say. But I am sure that everybody else -- the bigger shareholders -- are going to be asking Microsoft, 'why did you this?'"

(Additional reporting by Poornima Gupta in San Francisco; Jennifer Ablan, Megan Davies and Sinead Carew in New York; Sakthi Prasad in Bangalore; Clare Jim in Taipei; Melanie Lee in Singapore; Tarmo Virki in Helsinki; and Nicola Leske in Frankfurt. Writing by Edwin Chan; Editing by Robert MacMillan)