Microsoft Said Negotiating Skype Purchase

(Adds comment from consultant in fourth paragraph.)

Microsoft Corp., the world's largest software maker, is in talks to buy Skype Technologies SA to add Internet-calling tools, according to two people familiar with the matter.

A deal would value Skype at about $8.5 billion and may be announced as early as today, said one of the people, who asked not to be identified because the talks are private.

The world's biggest provider of international calls would give Microsoft access to Skype's 663 million users as Chief Executive Officer Steve Ballmer seeks to lure Web users and narrow Google Inc.'s lead in Internet advertising. The acquisition may be Microsoft's largest, dwarfing the purchase of AQuantive for about $6 billion in 2007.

"Microsoft has a lot of areas in its overall Internet business that it could be working on, and whether the acquisition of Skype is the key silver bullet that fixes all of that remains to be seen," said Kunal Bajaj, head of telecommunications consulting firm Analysys Mason India Pvt. in New Delhi. "People go to Skype to make phone calls, and there isn't much else in social networking, instant-messaging and status updates and things like that."

Microsoft fell 4 cents, or 0.2 percent, to $25.83 yesterday in Nasdaq Stock Market composite trading, extending the stock's decline to 7.5 percent this year.

Reviving Online Services

A purchase by Redmond, Washington-based Microsoft would divert Luxembourg-based Skype from a plan, announced in August, to sell $100 million of shares in an initial public offering. The company has also struggled to convert users of its free PC-to-PC phone services into paying customers, according to a March regulatory filing.

The price discussed includes net debt, one of the people said. Skype reported about $775 million in debt, along with a revolving credit line of $30 million, in a filing in April.

Ballmer is aiming to revive Microsoft's online services division, which had an operating loss of $726 million in the three months that ended in March. The company lags behind Google in Web search and related advertising.

Microsoft abandoned an unsolicited effort to buy Yahoo! Inc. for as much as $47.5 billion in 2008 and instead struck an agreement to provide search services on Yahoo's pages.

Skype's Founders

Skype was founded in 2003 by Niklas Zennstrom and Janus Friis and its investors include EBay Inc., private equity firm Silver Lake and venture capital firm Andreessen Horowitz.

Zennstrom and Friis sold the company to San Jose, California-based for $2.6 billion in 2005 to EBay, which in turn sold off most of its stake four years later.

Skype, which started as a way for consumers to chat for free online, is developing premium services such as group video calling and pursuing corporate accounts.

Melissa Havel, a spokeswoman for Microsoft, declined to comment. Jennifer Caukin, a spokeswoman for Skype, didn't return a request for comment. Microsoft's acquisition talks were previously reported by the Wall Street Journal.

With assistance from Mark Lee in Hong Kong, Edmond Lococo in Beijing, Dina Bass in Seattle and Brian Womack and Joseph Galante in San Francisco.

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