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Microsoft to Buy Skype for $8.5 Billion to Add Internet Calls

Tuesday, 10 May 2011 07:10 AM

Microsoft Corp. (MSFT) agreed to buy Skype Technologies SA for $8.5 billion in cash to gain the world’s most popular Internet calling service and its 663 million customers.

Microsoft will acquire Luxembourg-based Skype from an investor group led by Silver Lake, the companies said in a statement today. The agreement was approved by the boards of directors of both companies.

The takeover may help Microsoft Chief Executive Officer Steve Ballmer attract Web users and narrow Google Inc. (GOOG)’s lead in Internet advertising. The acquisition is Redmond, Washington- based Microsoft’s largest, surpassing the purchase of AQuantive Inc. for about $6 billion in 2007.

“This could give Microsoft a much-needed kick-start” in telecommunications, said Paolo Pescatore, an analyst at CCS Insight in London. In voice services, “Skype has certainly set the benchmark and gained a lot of traction.”

A purchase by Microsoft would divert Skype from a plan, announced in August, to sell $100 million of shares in an initial public offering. The company has struggled to convert users of its free PC-to-PC phone services into paying customers, according to a March regulatory filing.

Microsoft, the world’s largest software maker, slipped 1.8 percent to the equivalent of $25.58 at 2:06 p.m. in German trading. The stock fell 4 cents, or 0.2 percent, to $25.83 yesterday in Nasdaq Stock Market composite trading, extending the stock’s decline to 7.5 percent this year.


The price includes net debt, a person familiar with the matter said. Skype reported about $775 million in debt, along with a revolving credit line of $30 million, in a filing in April.

Ballmer is aiming to revive Microsoft’s online services division, which had an operating loss of more than $700 million in the three months that ended in March. The company lags behind Google in Web search and related advertising.

“Microsoft has a lot of areas in its overall Internet business that it could be working on, and whether the acquisition of Skype is the key silver bullet that fixes all of that remains to be seen,” said Kunal Bajaj, head of telecommunications consulting firm Analysys Mason India Pvt. in New Delhi. “People go to Skype to make phone calls, and there isn’t much else in social networking, instant-messaging and status updates and things like that.”

Yahoo! Bid

Microsoft abandoned an unsolicited effort to buy Yahoo! Inc. for as much as $47.5 billion in 2008 and instead struck an agreement to provide search services on Yahoo’s pages.

Microsoft offers voice chat services to consumers through its Windows Live Messenger software, and to corporate customers through its Lync collaboration platform.

Tightly-integrated Skype services could be an added selling point for Windows Phone 7, the mobile operating system Microsoft is promoting as a competitor to Google’s Android and Apple’s iOS, CCS’s Pescatore said.

Skype was founded in 2003 by Niklas Zennstrom and Janus Friis and its investors include EBay Inc. (EBAY), private equity firm Silver Lake and venture capital firm Andreessen Horowitz.

Zennstrom and Friis sold the company for $2.6 billion in 2005 to San Jose, California-based EBay, which in turn sold off most of its stake four years later.

Free Chats

Skype, which started as a way for consumers to chat for free online, is developing premium services such as group video calling and pursuing corporate accounts. Skype’s competitors include the fledgling Google Voice service and video chat client Fring.

“Google is probably the one that’s getting the closest to Skype” with its voice product, though the Google Talk service is “not on par in terms of quality” and the Google Voice product is a late entrant and will find it difficult to catch up, said Leif-Olof Wallin, a telecommunications analyst at Gartner Inc. in Stockholm. Vonage Holdings Corp. (VG) is another rival in the paid-for business in the U.S., he said.

“The biggest monetization potential is through ads, but you’d need to understand how often people are using Skype, like measuring calls, but that is difficult,” he said.

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS) are advising Skype on the deal.

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