Microsoft buys Skype for $8.5 billion

Announcing the largest deal in its 36 year history, Microsoft said earlier today that it would acquire internet telephony firm Skype for $8.5 billion, all-cash.  The Redmond software giant will integrate Skype into Xbox, Kinect, and Windows Phone, along with its Outlook/Lync/Exchange enterprise platform.  The company is investing heavily in mobile technology, and integrating the world’s most popular VoIP voice/video chat service should give that effort a shot in the arm, while also further extending the company’s enterprise leadership.  Microsoft says Skype users who don’t run Windows or Windows Phone shouldn’t worry, as it will continue to “to invest in and support Skype clients on non-Microsoft platforms.”

Skype’s current CEO, Tony Bates, will head the new Microsoft Skype Division, reporting directly to Microsoft CEO Steve Ballmer.  Skype boasts 663 million users worldwide, and its users made 207 billion minutes of voice and video calls last year.  Most of these calls, however, were free, which has made it difficult for the company to make money since it was founded in 2003.

Rumors swirled over the last few weeks that Google was looking to buy Skype, but an IPO was the most likely option, so Microsoft’s offer had to be high enough to convice Skype shareholders that life in the Microsoft fold would be better– hence the hefty price premium.  Microsoft is an investor in Facebook, which may now be able to tap into Skype’s network via Microsoft. Apple appears to be building massive server capacity to make a big telecommunications play (perhaps by extending its current FaceTime video chat service), and Google of course has its Google Voice service, so we’re likely to see a three-way internet telecom battle between the Microsoft-Skype-Facebook combine, Apple, and Google.

eBay first bought Skype in 2005 for $2.5 billion, but having found little potential for synergies, it sold off most of the company to an investment group led by Silver Lake in 2009 at a valuation of $2.75 billion.  Microsoft’s purchase price today is over three times that.  With this deal, Skype will gain a permanent home and likely a central role in Microsoft’s bid to gain prominence in Internet services and the mobile arena.  Microsoft has an estimated $48 billion in cash reserves, and the Skype deal would be its largest deal in 36 years.  The operating system giant’s last big-ticket acquisition was its $6 billion purchase of online ad firm aQuantive in 2007.  The Skype deal has been approved by both companies’ boards of directors and is expected to close by the end of the year.

Press release after the break.

Microsoft to Acquire Skype
Combined companies will benefit consumers, businesses and increase market opportunity.

REDMOND, Wash., and LUXEMBOURG – May 10, 2011 – Microsoft Corp. (Nasdaq: “MSFT”) and Skype Global S.à r.l today announced that they have entered into a definitive agreement under which Microsoft will acquire Skype, the leading Internet communications company, for $8.5 billion in cash from the investor group led by Silver Lake. The agreement has been approved by the boards of directors of both Microsoft and Skype.

The acquisition will increase the accessibility of real-time video and voice communications, bringing benefits to both consumers and enterprise users and generating significant new business and revenue opportunities. The combination will extend Skype’s world-class brand and the reach of its networked platform, while enhancing Microsoft’s existing portfolio of real-time communications products and services.

With 170 million connected users and over 207 billion minutes of voice and video conversations in 2010, Skype has been a pioneer in creating rich, meaningful connections among friends, families and business colleagues globally. Microsoft has a long-standing focus and investment in real-time communications across its various platforms, including Lync (which saw 30 percent revenue growth in Q3), Outlook, Messenger, Hotmail and Xbox LIVE.

Skype will support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities. Microsoft will continue to invest in and support Skype clients on non-Microsoft platforms.

“Skype is a phenomenal service that is loved by millions of people around the world,” said Microsoft CEO Steve Ballmer. “Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world.”

Skype will become a new business division within Microsoft, and Skype CEO Tony Bates will assume the title of president of the Microsoft Skype Division, reporting directly to Ballmer.

“Microsoft and Skype share the vision of bringing software innovation and products to our customers,” said Tony Bates. “Together, we will be able to accelerate Skype’s plans to extend our global community and introduce new ways for everyone to communicate and collaborate,” Bates said.

“Tony Bates has a great track record as a leader and will strengthen the Microsoft management team. I’m looking forward to Skype’s talented global workforce bringing its insights, ideas and experience to Microsoft,” Ballmer said.

Speaking on behalf of the investor group that sold Skype to Microsoft, Egon Durban, managing director of Silver Lake, said: “We are thrilled with Skype’s transformation during the period of our ownership and grateful for the extraordinary commitment of its management team and employees. We are excited about Skype’s long-term future with Microsoft, as it is poised to become one of the world’s most dynamic and comprehensive communications platforms.”

Founded in 2003, Skype was acquired by eBay in September 2005, and then acquired by an investment group led by Silver Lake in November 2009. Skype has made impressive progress over the past 18 months under Silver Lake’s leadership, increasing monthly calling minutes by 150 percent, developing new revenue streams and strategic partnerships, acquiring the intellectual property powering its peer-to-peer network, and recruiting an outstanding senior management team.

Other members of the selling investor group led by Silver Lake include eBay International AG, CPP Investment Board, Joltid Limited in partnership with Europlay Capital Advisors; and Andreessen Horowitz.

The acquisition is subject to regulatory approvals and other customary closing conditions. The parties hope to obtain all required regulatory clearances during the course of this calendar year.

About Skype
Skype is communications software whose purpose is to break down barriers to communication. With an Internet-connected device, families, friends and colleagues can get together for free with messaging, voice and video. At low cost, they can also call landlines or mobiles virtually anywhere in the world. Skype has recently introduced group video, allowing groups of more than two people to do things together whenever they’re apart.

Founded in 2003 and based in Luxembourg. Skype can be downloaded onto computers, mobile phones and other connected devices for free.