Microsoft closes in on £5bn deal for Skype

City A.M. Reporter
Microsoft Corp is close to buying Web video conferencing service Skype Technologies for $8.5bn (£5.1bn) 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 Inc 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.

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