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Microsoft agrees to buys Skype for $8.5 billion

May 10, 2011 |  7:47 am

Skype

In its largest acquisition ever and the tech world's most massive deal in years, Microsoft Corp. has agreed to buy Internet communications company Skype Global for a stunning $8.5 billion.

"The combination will extend Skype's world-class brand and the reach of its networked platform, while enhancing Microsoft's existing portfolio of real-time communications products and services," the companies said in a statement.

Previously, Microsoft's biggest buy was $6 billion for online advertising firm aQuantive in 2007.

Skype's software allows users to talk for free online using messaging, voice and video and can also connect them to a land line or mobile phone for a fee. Users will now be able to connect to Microsoft offerings such as Lync, Outlook and Xbox Live, while Skype will support devices such as Xbox and Kinect, the companies said. 

Skype is owned by an investment group led by Silver Lake, which bought the real-time voice and video company from its previous owner, eBay, in 2009 for slightly more than $2 billion. It was founded in 2003 and now has 170 million connected users who chatted for 207 billion minutes last year. 

The company will become a new division of Microsoft and will be led by its current chief executive, Tony Bates. 

News of the all-cash deal sent Microsoft shares down less than a percent to $25.72 in early morning trading. But Ben Horowitz, general partner of Menlo Park-based venture capital firm Andreessen Horowitz -- an owner of Skype along with Silver Lake -- said the purchase is a "smart move."

The combination, he said, will give Skype and Microsoft the competitive heft to combat Google and the Facetime video chat function from the Apple iPhone.

"Many observers believed that as the world inevitably transitioned to mobile and Web, Skype would be left in the dust," Horowitz wrote in a blog post. "In retrospect, it was easy for people to underestimate the quality of the Skype engineering team and the power of Skype's network effect."

The boards of both companies have approved the deal, which is now subject to regulatory approval. The companies said they hope to finalize the deal this year.

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-- Tiffany Hsu

Photo: Skype's offices in Palo Alto. Credit: Tony Avelar / Bloomberg

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