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Why Microsoft Paid $8.5bn For Skype

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It takes something special for technology to become front page news, but that is what has happened following Microsoft's blockbuster agreement to buy Skype for $8.5bn (£5.2m). The deal represents Microsoft's biggest ever purchase and the size of the fee has left many scratching their heads. Why would Microsoft pay so much for a company which cost just $2bn in 2009? We'll tell you why…

The first hints come from looking at the deal itself. As incredible as the price is, equally remarkable is Microsoft is paying investor group and Skype owner Silver Lake "in cash". No stock options, no complex trades, cash. Which immediately tells you one thing: Microsoft was in no mood to lose out. Rumour has it both Facebook and Google were in the running and Microsoft has lost enough of the limelight to them in recent years.
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"Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world," proclaimed Microsoft CEO Steve Ballmer in an official statement.

Answering speculation as to how Microsoft will use Skype, Ballmer was clear: it would be in everything. "Skype will support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities."

Is this smart or is it simply throwing mud against the wall and seeing what sticks? After all eBay bought Skype in 2005 for $2.6bn before admitting it had "limited synergies with eBay and PayPal" and selling it off to Silver Lake for $1.9bn in 2009}. Right now Silver Lake is laughing all the way to the bank.

ebay

But let's not be too hasty. This is a deal where both parties could come out smiling. According to Microsoft, Skype membership reached 170m users last year and over 207m minutes of voice and video conversations were made using the service in 2010. Skype also has revenues approaching $1bn per year and a solid, growing business model. Compare that with Facebook, recently valued at over $80bn in March, and it sounds like a steal.all

We would go further too. We'd say Microsoft had little choice. Newspapers and websites around the world are currently theorising about how Microsoft will use Skype, but Ballmer has already given the answer: everywhere. He isn't being glib. There is a master plan…

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