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Business

Microsoft to buy Skype

Microsoft has announced it will acquire Internet telephony pioneer Skype in its biggest takeover to date. Analysts are divided on whether the multibillion dollar price tag is justified.

Montage of Skype logos and graphics

Founded in 2003, Skype has more than 550 million users

Microsoft announced Tuesday it is set to purchase the Internet telephony company Skype in a multibillion-dollar deal that is its biggest ever.

Microsoft will pay $8.5 billion (5.98 billion euros) for the Luxembourg-based company. An article in the Wall Street Journal Tuesday indicated that the price appears to be the result of a three-way bidding war between Microsoft, Google and Facebook.

US media say the deal is aimed at boosting Microsoft's ailing smartphone business. Skype account holders can make free telephone and video calls using the Internet. The company derives its income from fees charged on calls to and from landlines. It has more than 550 million registered users worldwide.

Two Microsoft smartphones

Microsoft hopes Skype can help boost its smartphone business

Although the price tag will not stretch cash-rich Microsoft, some analysts say the offer is high given that Skype posted a loss last year.

"The big unanswered question is how do Skype assets work for Microsoft," Ben Wood, head of research firm CCS Insight, told Reuters. "They already have instant messaging, IP telephony... how do you justify the price?"

"That being said, Skype is a vibrant community, a diverse global community with a young population and Skype is making inroads into older parts of the population too," he added.

Changing hands

The software that drives Skype was developed by a team of Estonian programmers. The company itself was set up in 2003 by Swedish entrepreneur Niklas Zennström and his Danish associate Janus Friis - the two businessmen behind the Kazaa file-sharing platform that became the target of music piracy lawsuits from 2001 onwards.

Skype was taken over by eBay in 2005 for $2.6 billion in cash and stock. The online auction website aimed to use the software to improve communication between buyers and sellers, but the experiment failed.

In 2009 eBay sold a 70 percent stake to a group of technology investors including Silver Lake Partners and the Canada Pension Plan Investment Board for just over $2 billion.

A man makes a phone call using VoIP technology

Skype allows users to make calls between computers and regular telephones

Last August, Skype filed documents to go public but put its plans on hold after hiring a new chief executive, Tony Bates. Media reports at the time said Skype expected to raise roughly $1 billion through its initial public offering.

By mid 2010, Skype had 124 million users connecting every month. About 8.1 million were paying customers, using the Skype network to make calls to traditional phones at discounted rates. The company generated $860 million in revenue but posted a net loss of $7 million, according to data in its initial public offering filing.

Strategic break

The deal will be Microsoft's biggest acquisition since its formation in 1975, exceeding the $6 billion it paid for online ad agency aQuantive in 2007, which was regarded as a failure.

Microsoft rarely makes such large acquisitions, preferring to buy smaller startups instead.

Its shareholders have been particularly wary of big-ticket deals since 2008, when the Seattle-based company's $47.5 billion bid for web giant Yahoo was rebuffed, paving the way for a web-search agreement that saw Yahoo shares fall in value by roughly half.

Microsoft's most high profile Internet purchase was the $240 million it paid for a 1.6 percent share in Facebook in 2007. However, it has also been also pumping large amounts of cash into its MSN Internet portal and Bing search engine, racking up $7 billion in losses over the past four years.

Merger trend

Windows 7, Bing and Microsoft Surface logos

Microsoft has invested heavily in new products as it tries to keep up with Google

Technology sector mergers and acquisitions have spiked since last summer, fuelled by rising confidence in the economy and companies under pressure to spend large amounts of cash stockpiled on their balance sheets.

Recent statistics from Thomson Reuters show global deal volumes so far this year are up 55 percent compared with the same period in 2010.

Author: Sam Edmonds (Reuters, dpa, AFP)

Editor: Cyrus Farivar

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