Microsoft Will Buy Skype for $8.5 Billion

Microsoft plans to acquire Skype for $8.5 billion, making the VOIP provider a new business division within the company.

Microsoft plans to acquire Internet communications provider Skype for $8.5 billion.

Under the terms of the agreement, Skype will transform into a business division within Microsoft, headed by Skype CEO Tony Bates. Skype will support Microsoft products such as Windows Phone and Kinect, and integrate with Microsoft's already extensive communications portfolio, which includes services such as Lync and Messenger.

Rumors circulated for days that Skype, having delayed its $100 million IPO, was eyeing a partnership with another tech giant. However, reports pegged either Google or Facebook as the suitor in question, with a May 4 Reuters article suggesting-based on unnamed sources "with direct knowledge of the discussions"-that Facebook CEO Mark Zuckerberg was "involved in internal discussions" about either a joint venture or outright acquisition.

Skype previously found itself an acquisition target in 2005, when eBay agreed to pay $2.6 billion in cash and stock for the then two-year-old company. Four years later, the auction site announced it would sell a majority of its Skype holdings to a team of private investors for $1.9 billion in cash. By the second half of 2010, Skype boasted an average of 124 million connected users a month, and was reportedly trying to raise money for an IPO. However, that offering was delayed after the company appointed Tony Bates to the role of CEO in October.

Although Skype remains a recognizable brand worldwide-and claims some 25 percent of the world's international long-distance voice-calling minutes-it faced rising competition from Google and smaller VOIP (voice-over-IP) services. In January, the company announced that it had entered into a definitive agreement to purchase Qik, a provider of mobile video software and services. Online reports at the time pegged the price tag at $100 million, although neither company official disclosed the terms of the deal.

While Skype will surely buttress Microsoft's existing communications portfolio, some analysts aren't quite so enchanted about the acquisition.

"Wall Street hated the deal when eBay bought it, and they only paid 1/4 of what Microsoft is now paying," Roger Kay, founder and president of Endpoint Technologies Associates, wrote in a May 10 email to eWEEK. "In eight years, Skype hasn't made any money, and even at the operating level, it would take three decades to pay out in cash terms alone."

Other analysts seem more upbeat.

"Skype refreshes the Microsoft customer base with 170 million early-adopter progressive users," Ray Wang, principal analyst and CEO at Constellation Research, wrote in a May 10 email to eWEEK. "Microsoft gets a social platform that accelerates its work on Lync. Microsoft will gain a VOIP platform critical for future unified communications."

Microsoft will fill out details in a live press conference scheduled for 11 a.m. EST.