February 23, 2024

DealBook: Microsoft in Talks to Acquire Skype for $8.5 Billion

12:20 a.m. | Updated

Microsoft is in advanced talks to acquire Skype, which revolutionized telephone calls over the Internet, for $8.5 billion, including the assumption of debt, according to people involved in the negotiations.

A deal is expected to be announced Tuesday morning, these people said, although they cautioned that the talks could still fall apart. A spokesman for Skype declined to comment, and calls to Microsoft were not returned.

The acquisition would be Microsoft’s largest ever and it is the software giant’s effort to gain a foothold in the world of voice and video communications. Microsoft would be able leverage Skype’s more than 600 million registered users into using its other products. For example, it could be connected to Microsoft’s Xbox 360 and Kinect systems,  and integrated into the company’s flagship product, Office, as a way for business users to better collaborate.

It could also help Bing, its search engine, which competes with Google. It may also help bolster Microsoft’s fledging mobile telephone offering, which lags far behind Apple’s iOS and Google’s Android operating systems. The deal would end months of speculation in Silicon Valley about Skype’s future. The company had been planning an initial public offering but delayed those plans last year, leading to persistent rumors that it would be sold to another technology giant like Facebook, Google or Cisco Systems.

News of the deal and Microsoft’s interest in Skype was first reported by The Wall Street Journal online and the technology site GigaOM.

Skype has some 663 million registered users, the company said in a recent filing. Although most of its services are free, Skype makes the bulk of its profits from a small fraction of its users who pay for long distance calls to telephone numbers. Despite its popularity, the service has struggled to maintain profitability; in 2010, Skype made $859.8 million in revenue but recorded a net loss of $7 million, according to its filing.

Skype burst onto the scene in 2003 and has long been seen as a challenger to the telephone companies because it can route phone calls — and video calls — over the Internet free or for a nominal fee. Most telephone carriers have come to accept Skype, but still see it as a potential threat. It is unclear how the wireless carriers that support handsets with Microsoft’s operating system would view the deal and how tightly Microsoft would seek to integrate Skype into mobile.

Microsoft, analysts say, is making a move to block Google from gaining greater ground in Internet communications.

“This is part of the strategic fight between Microsoft and Google,” said Rob Enderle, an independent technology analyst.

Facebook, Mr. Enderle said, has a large market value, but not the cash to do deals as Microsoft does. “Microsoft is backing Facebook’s play, and to some degree entering this fight on Facebook’s side of this strategic confrontation with Google,” he said.

Microsoft, analysts say, has often been an astute acquirer of start-ups and smaller companies, picking off technical teams that are then folded into products likes Windows, Office and Internet Explorer. But during Steve Ballmer’s tenure as chief executive, beginning in 2000, the company has also made far larger, riskier bids, mostly unsuccessful.

In 2004, Microsoft entered into talks to buy the big business software company SAP, for about $50 billion, according to testimony that came out in a court case.

In 2007, Microsoft acquired aQuantive, an online advertising company, for roughly $6 billion, a sizable premium, and some suggested it overpaid.

Nearly three years ago, the company made a surprise $48 billion offer for Yahoo. Talks then broke off, and Microsoft withdrew its bid, but later reached a partnership to take over Yahoo’s search business.

If a deal for Skype is reached, it would be the second time a technology giant has acquired the company. EBay bought Skype in 2005 for $2.6 billion with hopes of tightly integrating the service as a sales tool.

But the deal never lived up to its promise and eBay took a $1.4 billion write-down on its investment. Skype was sold in 2007 to a consortium of investors led by Silver Lake Partners, Index Ventures, Andreessen Horowitz and the Canada Pension Plan Investment Board. Marc Andreessen of Andreessen Horowitz, who co-founded Netscape Communications, was seen as a pivotal matchmaker for Skype, at one point trying to put it together with Facebook, another company for which he is on the board, according to people involved in the discussions.

JPMorgan Chase and Goldman Sachs are advising Skype.

Evelyn M. Rusli and Verne Kopytoff contributed reporting.

Article source: http://dealbook.nytimes.com/2011/05/09/microsoft-in-talks-to-acquire-skype-for-8-5-billion/?partner=rss&emc=rss

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