Microsoft has agreed to buy internet telephone company Skype for $8.5 billion in cash in its biggest deal to date.
The deal to buy loss-making Skype will have no immediate impact on Microsoft's finances but makes clear its intention to compete with rivals such as Apple and Google.
Microsoft already has video chat as a function in its Windows Live Messenger service, but it is not available on its Windows Phone 7 software.
Skype also makes versions of its own service which can be used as an application on the iPhone and iPad, Research in Motion's BlackBerry and Android phones. It cannot be used on Microsoft phones.
Despite doubling sales and profit in the last eight years, Microsoft's stock has largely languished at the same level, as investors worry about its ability to counter new rivals such as Google or adapt to new ways of computing.
Skype's planned IPO had been expected to raise about $1 billion.
The deal is relatively small for Microsoft, which has $50 billion in cash and short-term investments on its balance sheet. The $8.5 billion purchase price would likely include the $686 million in long-term debt on Skype's balance sheet.
Luxembourg-based Skype, which had delayed plans for an initial public offering, had recently been looking at other options.
Skype was formed in 2003. Ebay bought it in 2005 for $3.1 billion. Last year it took in $860 million in revenue but made 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 an investor group that included Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz for $1.9 billion in cash and a $125 million note. Ebay retained about a third of the company.
Last year, Skype had about 124 million connected users every month by the end of June. But 8.1 million were paying customers, using Skype to make calls to traditional phones at discounted rates.
A deal would be Microsoft's biggest acquisition since its formation in 1975 if it goes ahead, exceeding the $6 billion it paid for online ad agency aQuantive in 2007, which was not a success.
Microsoft's most high profile internet purchase was the $240 million it paid for a 1.6 per cent share in Facebook in 2007. However, it is also plowing money into its MSN internet portal and Bing search engine, racking up $7 billion in losses in the last four years.
Reuters
