Microsoft to buy Skype for pricey $8.5 bln

NEW YORK Tue May 10, 2011 12:39pm EDT

A page from the Skype website is seen in Singapore May 10, 2011. REUTERS/David Loh

A page from the Skype website is seen in Singapore May 10, 2011.

Credit: Reuters/David Loh

NEW YORK (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 about 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. They planned to use the provider of Internet telephone services to keep users glued to their online communities.

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 favour among small business users.

But investors expressed scepticism over the deal, sending Microsoft shares down 1.4 percent to $25.46.

"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."

The deal would be a big payday for Skype's owners, online auction site eBay Inc (EBAY.O) and investors including Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz.

"We are a super-ambitious company," Ballmer told reporters on Tuesday.

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.

Skype delayed plans for an initial public offering that was expected to value the company at more than $3 billion. It looked at other options, including tie-ups with Facebook and Google. Such a deal was expected to value Skype at $3 billion to $4 billion..

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 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.

"I can't wait to hear the logic behind this," said Fort Pitt Capital's Kim Caughey Forrest. "They really have to do some explaining on the call as to how this company merited that price and how they'll return the value to shareholders."

A MOBILE PRESENCE

Longer-term, Skype 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 is set to become a new business division within Microsoft with Skype CEO Tony Bates in charge and reporting directly to Ballmer, Microsoft said.

The Skype deal is the biggest in the 36-year history of the world's largest software company.

The $8.5 billion price tag was a surprise. Although the sum would not stretch cash-rich Microsoft, some said it was high for a company whose ownership has changed several times during its relatively short life.

"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, was bought by eBay Inc (EBAY.O) in 2005 for $3.1 billion. Last year it had $860 million in revenue, and a net loss of $7 million, according to data in its initial public offering filing.

In 2009, eBay sold a majority stake in Skype to the investor group for $1.9 billion in cash and a $125 million note. EBay retained about a third.

Ballmer said his company did not use Wall Street advisers on the deal, approaching the investor group that owns Skype directly. Skype was advised by Goldman Sachs (GS.N) and JPMorgan (JPM.N). (Additional reporting by Poornima Gupta in San Francisco; Megan Davies, Bill Rigby 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 Alexander Smith; Editing by Louise Heavens, Derek Caney and Robert MacMillan)