UPDATE 10-Microsoft to buy Skype for pricey $8.5 bln

Tue May 10, 2011 5:32pm EDT

 * Deal is software company's biggest purchase
 * Price is twice recent valuation talk
 * Goldman, JPMorgan advise Skype, Microsoft goes direct
 * Microsoft shares close off 0.62 pct at $25.67
 (Adds link to Skype graphic, closing share price)
 By Nadia Damouni and Bill Rigby
 NEW YORK, May 10 (Reuters) - Microsoft Corp (MSFT.O) plans
to buy Internet phone service Skype for $8.5 billion in its
biggest-ever acquisition, placing a rich bet on mobile and the
Internet to try to best rivals such as Google Inc (GOOG.O).
 In a deal that took a month from offer to signing, the
software company outbid Google and Facebook, which sources said
offered to partner or buy Skype for $3 billion to $4 billion.
 Microsoft's interest in the money-losing, but popular
service highlights a need to gain new customers for its Windows
and Office software. Skype has 145 million users on average
each month and has gained favor among small business users.
 But investors expressed skepticism over the deal, sending
Microsoft shares down 0.62 percent to $25.67. If those losses
hold, the software giant's market value -- already exceeded by
Apple Inc (AAPL.O) last year -- will slip behind General
Electric Co's (GE.N) and begin to approach IBM's (IBM.N).
 Led by private equity firm Silver Lake, eBay Inc (EBAY.O)
and other investors including the Canada Pension Plan
Investment Board and Andreessen Horowitz, would make $5
billion, or three times their investment, a source familiar
with the deal said [ID:nN10105729]
 Microsoft is putting more energy and resources into mobile
and the Internet as the personal computer business underpinning
its Windows and Office franchise appears to be under threat.
 The Luxembourg-based company, which allows people to make
calls at no charge, but has also developed premium services,
would give Microsoft a foothold in the video-conferencing
market as businesses shift to cheaper ways of communicating.
 Skype delayed plans for an IPO that was expected to value
the company at more than $3 billion. It looked tie-ups with
Facebook and Google. Such a deal was expected to value Skype at
$3 billion to $4 billion. [ID:nN04117305].
"It doesn't make sense at all as a financial investment,"
said Forrester Research analyst Andrew Bartels. "There's no way
Microsoft is going to generate enough revenue and profit from
Skype to compensate."
  Take a Look                            [ID:nN1099356]
  Reuters Breakingviews                 [ID:nN10270736]
  Windows sales slip, shares adrift     [ID:nN28287884]
  Reuters Insider show:  link.reuters.com/get49r
 Link to Skype Graphic:  r.reuters.com/syv49r
 Skype could be combined with Microsoft software such as
Outlook to appeal to corporate users, while the voice and video
communications could link to Microsoft's Xbox live gaming.
 Skype also would offer Microsoft another route to develop
its mobile presence, an area it has already put more energy and
resources into as PC usage comes under threat.
 Skype would become a new business division within Microsoft
with Skype CEO Tony Bates in charge and reporting to Ballmer.
 "Tony didn't look for it. The ownership group, led by
Silver Lake, didn't look for it. We just decided (it was)
something that we thought made sense for us," a jubilant
Ballmer told reporters.
 The sum would not stretch Microsoft. It would bankroll the
deal with cash sitting overseas, which would be taxed if
Microsoft brought it home. But others said the price was high.
 "In this atmosphere of Internet Bubble 2.0, picking up an
unprofitable online company for roughly 10 times sales probably
seems downright cheap," said Shanghai-based Michael Clendenin,
managing director of consulting firm RedTech Advisors.
 "But if you consider (it) was just valued at about $2.5
billion 18 months ago when a chunk was sold off, then $8.5
billion seems generous and means Microsoft has a high wall to
climb to prove to investors that Skype is a necessary linchpin
for the company's online and mobile strategy," he said.
 Skype, which was formed in 2003. EBay Inc (EBAY.O) bought
it in 2005 for $3.1 billion. Last year, it lost $7 million,
according to data in its initial public offering filing.
 In 2009, eBay sold a majority stake in Skype for $1.9
billion in cash and a $125 million note. EBay retained about a
third. [ID:nN04117305]
 Ballmer said his company did not use Wall Street advisers
on the deal, approaching the owners directly. Goldman Sachs and
JPMorgan advised Skype. [ID:nN10101025]
 The deal, the biggest in technology so far in 2011, capped
the strongest start to deal-making since 2000, according to
Thomson Reuters data. (For a graphic on technology deals, click
here: r.reuters.com/vev49r)
 "I wish they had not done it," said Whitney Tilson,
founder and a managing partner of T2 Partners LLC, which owns
Microsoft shares. "Everybody I know uses it and I am glad
Microsoft owns it. They just probably paid too much for it."
 "We aren't big enough to have a big say. But I am sure that
everybody else -- the bigger shareholders -- are going to be
asking Microsoft, 'why did you this?'"
 (Additional reporting by Poornima Gupta in San Francisco;
Jennifer Ablan, Megan Davies and Sinead Carew in New York;
Sakthi Prasad in Bangalore; Clare Jim in Taipei; Melanie Lee in
Singapore; Tarmo Virki in Helsinki; and Nicola Leske in
Frankfurt. Writing by Edwin Chan; Editing by Robert MacMillan)

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