By Ben Rooney, staff reporter @CNNMoneyTech May 10, 2011: 11:01 AM ET
Skype's home page. The Internet phone service is being purchased by Microsoft for $8.5 billion.
NEW YORK (CNNMoney) -- Microsoft has agreed to buy Internet phone service provider Skype for $8.5 billion in cash, the companies announced Tuesday.
The deal gives Microsoft (MSFT, Fortune 500) access to the market for real-time video and voice communications. The software maker said it plans to use Skype to support such products as the Xbox gaming system and Windows Phone.
As the largest acquisition in its history, the deal marks a significant change in strategy for Microsoft, which has not bought another company since 2006.
"Skype is a phenomenal service that is loved by millions of people around the world," said Microsoft chief executive Steve Ballmer.
Behind the deal
In 2010, Skype had 170 million connected users who logged over 207 billion minutes of voice and video conversations. The company reported a $6.9 million net loss last year, on nearly $860 million in revenue. It reported $686 million in long-term debt, and slightly more than $1 billion in liabilities.
Under the terms of the deal, Microsoft will assume Skype's debt.
Skype will become a new business unit within Microsoft, to be run by current Skype CEO Tony Bates, who will report directly to Ballmer.
Skype filed for a $100 million IPO last year. But the actual offering was delayed, and rumors surfaced last week that the company was in talks with Microsoft and Facebook.
"The deal is strategically sound," said Christopher Hickey, an analyst at Atlantic Equities. "There are clear revenue opportunities for Microsoft."
He said the price was "slightly expensive," but added that Microsoft plans to use its offshore cash balance to cover the cost. "It's expensive, but it's not the end of the world."
For consumers, the look and feel of Skype should remain the same, said Hickey. Microsoft is mainly interested in incorporating Skype's functionality into its existing products, and leveraging the company's user base.
"The advantage of Skype is that it's just as applicable to Microsoft's consumer base as its business base," he said. "Most of Microsoft's challenges are traditionally on the consumer side of its business."
Google is killing the voice plan
Founded in 2003, Skype was bought by Ebay in 2005 for $2.6 billion. But the partnership did not work out and eBay sold its 65% stake in Skype to an investor group for $1.9 billion in 2009.
The group was led by private equity firm Silver Lake, but eBay retained a small stake in the company.
Microsoft shares fell more than 1% in early trading Tuesday. The stock is down nearly 9% so far this year.
Hickey said the deal raises questions about Microsoft's acquisition strategy going forward.
"Investors are wondering whether this signals a change in M&A strategy for Microsoft, which hasn't been very acquisitive in the last ten years," he said.
BlackBerry maker Research In Motion (RIIM) is one of the companies that has been mentioned as a possible Microsoft target.
Credit: CNN (www.cnn.com)
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