Microsoft close to buying Skype for $8.5bn

New York - Microsoft is close to buying Web video conferencing service Skype Technologies for $8.5bn including debt, a source familiar with the situation said, underscoring the technology giant's growing ambition to plug a hole in its mobile offerings.

Buying money-losing Skype would have no immediate impact on Microsoft's finances, but would make clear its intention to compete with rivals such as Apple and Google.

Microsoft is putting more energy and resources into the mobile and internet arenas as the importance of the personal computers underpinning its Windows and Office franchise appears to be under threat.

Microsoft's deal with Skype is expected to be announced as early as Tuesday morning, the source said. The source declined to be named because the talks are not public. Microsoft and Skype declined comment.

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

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.

Facebook and Google were separately considering a tie-up with Skype, two sources with direct knowledge of the discussions previously told Reuters. Google had held early talks for a joint venture with Skype, the second source said.

A source said at the time such a deal could value Skype at $3bn to $4bn - far less than the value put on it by Microsoft's interest.

Skype's planned IPO had been expected to raise about $1bn, several other sources said at the time.

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 app on the iPhone and iPad, Research in Motion's BlackBerry and Android phones. It cannot be used on Microsoft phones.

Apple's FaceTime video calling service - available on its latest iPhone and Mac computers - has been a big hit with consumers. Google recently followed suit by adding video to its popular Google Talk application for smartphones running on its Android system.

Cash pile

The deal is relatively small for Microsoft, which has $50bn in cash and short-term investments on its balance sheet. The $8.5bn purchase price would likely include the $686m in long-term debt on Skype's balance sheet.

"I think the price is quite reasonable," said Sean Lee, a Taipei-based manager of the Global Top Dividend Fund at Shinkong Investment Trust, which owns Microsoft shares.

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 $3.1bn. Last year it took in $860m in revenue but made a net loss of $7m, 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 $1.9bn in cash and a $125m 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 $6bn it paid for online ad agency aQuantive in 2007, which was not a success.

Microsoft shareholders are generally relieved that its $47.5bn offer for Yahoo in 2008 was rebuffed, paving the way for a web-search agreement which gives Microsoft most of what it wanted anyway, while Yahoo shares have halved in value.

Microsoft's most high profile internet purchase was the $240m it paid for a 1.6% share in Facebook in 2007. However, it is also plowing money into its MSN internet portal and Bing search engine, racking up $7bn in losses in the last four years.

Technology sector mergers and acquisitions have spiked since last summer, driven by increased confidence in the economy and companies facing pressure to spend mountains of cash stockpiled on their balance sheets.

Global deal volume year to date is up 55% when compared with the same period in 2010, recent figures from Thomson Reuters show.

Goldman Sachs and JPMorgan are advising Skype, the source said. Microsoft is not using advisers, the source said.

Earlier, tech blog GigaOM reported news of the potential deal.