Microsoft Corp. agreed to buy Internet phone company Skype Technologies SA for $8.5 billion in cash-the most aggressive move yet by Microsoft to play in the increasingly converged worlds of communication, information and entertainment.The deal will let Microsoft “be more ambitious, do more things,” Chief Executive Steve Ballmer said in an interview.
The Redmond, Wash., company was motivated to acquire Skype because communication technologies have been “the backbone” of Microsoft’s growth in recent years and that Skype has “built a real business” in the communications field, said Mr. Ballmer.
In a joint phone interview with Skype Chief Executive Tony Bates, Mr. Ballmer said Microsoft sees an opportunity to expand Skype’s reach by blending it with technologies across Microsoft’s vast portfolio of products, including the Xbox videogame console, Windows Phone software and Lync communications product for businesses.
When asked about the high value of the acquisition Mr. Ballmer said the deal will be accretive to Microsoft profits in “year one” after the transaction closes.
“We’re buying a company with Ebitda over $250 million,” he said. “We see an opportunity to accelerate its revenue and profit base.”
Skype will become a new business division within Microsoft, and Mr. Bates will assume the title of president of the Microsoft Skype Division, reporting directly to Mr. Ballmer.
Buying Skype-a service that connects millions of users around the world via Internet-based telephony and video-would give Microsoft a recognized brand name on the Internet at a time when it is struggling to get more traction in the consumer market. The need to add a communications component is seen as crucial with the growing popularity of Apple Inc.’s FaceTime video-chat service and Google Inc.’s Voice.
Mr. Ballmer vowed to continue to support Skype on non-Microsoft platforms, which means keeping the service available to iPhone and Mac users.
“We will continue to support non-Microsoft platforms because it’s fundamental to core value proposition,” Mr. Ballmer said during a conference call on Tuesday. He added Microsoft will continue to build upon Skype’s customer base.
Microsoft has invested heavily in marketing and improving the technology of its Bing search engine. While it has made some market share gains over the past year, Google still dominates the search market with more than 65% of U.S. searches going through its site.
About 170 million people log in to Skype’s services every month, though not all of them make calls. Skype users made 207 billion minutes of voice and video calls last year.
The Skype deal ranks as the biggest acquisition in the 36-year history of Microsoft, a company that traditionally has shied away from large deals. In 2007, Microsoft paid approximately $6 billion to acquire online advertising firm aQuantive Inc. Many current and former Microsoft executives believe Microsoft significantly overpaid for that deal. But they are also relieved that Microsoft gave up on an unsolicited $48 billion offer for Yahoo Inc. nearly three years ago. Yahoo is valued at half that sum today.
Mr. Ballmer, though, sees the Internet as an essential battleground for Microsoft, a company that still makes the vast bulk of its profits from Windows and Office software systems. Investors have become increasingly concerned about Microsoft’s ability to squeeze continued growth out of those businesses, as rival technologies from Apple, Google and others put more pressure on profits.
The division behind Microsoft’s hugely lucrative Office suite of applications also makes a product, known as Lync, which ties together email, instant messaging and voice communications into a single application. Skype could strengthen that offering.
The deal shows how far Skype has come since it was launched in 2003 by Niklas Zennstrom and Janus Friis, two men who had created a file-sharing technology called Kazaa that became widely associated with music piracy. While Skype was initially popular with techies, it increasingly worked its way into the mainstream by offering free or cheap phone calls which were especially appealing to international callers.
Microsoft Chief Financial Officer Peter Klein said he expects the Skype deal to get regulatory approval this year. The company is using cash held overseas to purchase Skype, which is based in Luxembourg. Mr. Ballmer added he expects Skype to be add to earnings in the first year after the deal closes.
When eBay Inc. purchased the company in 2005 for $2.6 billion in cash and stock, Skype was regarded as something of an experiment in which eBay’s buyers and sellers would use the service to communicate about potential transactions.
The experiment faltered, and eBay gave up on Skype in 2009,selling a 70% stake to a group of technology investors including Silver Lake Partners, venture capital firms Index Ventures and Andreessen Horowitz, and the Canada Pension Plan Investment Board, who will make a handsome return on the Microsoft transaction.
Goldman Sachs Group Inc. and J.P.Morgan Chase & Co. advised Skype on the deal, according to people familiar with the matter. Microsoft isn’t using any financial advisers for the deal, the people added.
The agreement was approved by the boards of Microsoft and Skype and is subject to regulatory approvals.
Microsoft shares fell 1.3% to $25.50 in midday trading Tuesday, while eBay shares were up 2.5% to $33.95.
For all its promise, Skype has had a mixed history as an operating business. It has produced little net profit in the eight years since it was founded. Profits continue to remain elusive as the company expands its business world-wide. Last year the company posted revenue of $860 million and $264 million in operating profits, but still had a loss of $7 million. The company had $686 million in long-term debt as of Dec. 31.
Skype uses a technology called voice over Internet protocol, which treats calls as data like email messages and routes them over the Internet, rather than a traditional phone network. Skype’s software, which can be downloaded free, allows users to call other Skype users on computers or certain cellphones for free. Skype users can also call land lines for a fee and conduct video calls.
Skype could play a role in Microsoft’s effort to turn around its fortunes in the mobile-phone market, an area where it has lagged behind rivals Apple and Google. The company last year launched a new operating system for mobile phones known as Windows Phone 7 that has been well reviewed by technology critics but hasn’t yet meaningfully improved Microsoft’s market share.
Microsoft will likely need to tread carefully, though, in integrating Skype into its mobile software because of the potential for pushback from wireless carriers, whose support Microsoft badly needs. Skype could give consumers a way to make cheap phone calls over the Internet from mobile phones, without paying higher rates to the carriers.
Last August, Skype filed documents to go public but put its IPO plans on hold after bringing in Mr. Bates. Skype had expected to raise close to $1 billion through its IPO, people familiar with the matter said at the time. At the same time, the Luxembourg-based company entertained conversations in the past with potential buyers and joint-venture partners, including Facebook Inc., Google and Cisco Systems Inc., according to other people familiar with the matter. Skype had sought between $5 billion and $6 billion to sell itself, they added. The blog GigaOm earlier reported news of Microsoft’s interest in Skype.