Microsoft Pays $8.5 Billion For Skype

Microsoft has jumped squarely into the communication sector with its purchase of Skype Technologies SA for $8.5 billion in cash. The VOIP phone service will headline a new division at the aging tech giant under the leadership of Skype’s Tony Bates. Bates will report directly to Microsoft’s Steve Balmer. News of the sale was first reported by the Wall Street Journal and is scheduled to be officially announced mid-day today (5/10).

Analysts believe the purchase will give Microsoft more top level online recognition which will also help strengthen the company’s Bing search engine. Microsoft said it plans to connect Skype with its Xbox and Kinect game consoles. Skype users rung up about 207 billion minutes of voice and video calls during 2010.

According to the WSJ, “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 Inc., Google and others put more pressure on profits.”

Interestingly, Skype’s VOIP technology has netted only small profits to date. In 2010 the company received revenue of $860 million with $264 million in operating profits but had a loss of $7 million due to its long term debt of $686 million.

The earnings multiple of approximately 32 illustrates that Microsoft is extremely bullish about Skype’s future.