Last updated: May 10, 2011 8:49 pm

Microsoft in $8.5bn Skype gamble

Microsoft took a bold step in the battle for control of the consumer internet on Tuesday with a $8.5bn (€5.9bn) acquisition of online telephone service Skype, its biggest acquisition and a deal that broadens its competition with Google and Apple.

The sale of one of the world’s best-known internet brands will hand a windfall profit of some $5bn to a group of investors who bought the company only 18 months ago, making it one of the biggest paydays in the buy-out industry.

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The sharp increase in price in such a short period prompted warnings from some analysts that a new internet bubble was building, though Microsoft’s share price slipped only marginally on the news.

Putting together Skype, which has 145m active users in an average month, with users of its existing devices and software platforms would boost the attractions of Microsoft’s products, said Steve Ballmer, Microsoft’s chief executive. Customers of devices such as the Xbox games console, as well as people who use Windows Phone and Outlook e-mail software, would be able to communicate more easily with each other and people on the wider Skype network, he added.

However, he promised that Skype would continue to be available on rival software platforms such as Apple’s iOS, which is used in the iPhone and iPad, and Google’s Android smartphone operating systems.

Skype

Skype

The acquisition follows a late move by Microsoft after Skype held preliminary discussions with Google and other companies about possible deals, according to people familiar with the discussions.

However, those talks did not lead to any offers and separate talks with Facebook were limited to extending a partnership between the two companies, these people said.

The acquisition follows the late-2009 buy-out of Skype from online retailer Ebay by a group led by Silicon Valley investment firm, Silver Lake. The company filed for an initial public offering late last year but the share sale was delayed as it discussed possible deals with other companies. Ebay retained a 30 per cent stake in the company, giving it a share of the latest windfall.

Microsoft and Skype suggested that the deal could give the software company a bigger foothold in the booming social networking business, using Skype’s list of contacts and status updates as the foundation for a network to link users.

“Skype is that inner circle of friends – 8 to 10 folks they talk to every day,” said Tony Bates, Skype’s chief executive, who will head a new division that Microsoft is creating to house the business. “How that intersects with social [media] is really exciting for us.” However, other companies, notably Google, have struggled to build wider services on top of online communications networks, analysts cautioned.

Microsoft said it would place more video advertising in Skype to boost revenues at the business. The acquisition follows a spate of IPO filings from other internet companies that have raised the valuation level for consumer internet companies.

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