Yes, Microsoft is buying Skype

May 10, 2011, 3:34 PM UTC

So much for that Skype IPO.

Fortune has confirmed that Microsoft (MSFT) has agreed to buy the voice-over-Internet company for $8.5 billion, including the assumption of debt. Expect a formal announcement within the next hour.

There had been reports last week that Skype was in acquisition or partnership talks with both Microsoft and Facebook.

Skype will become a new business unit within Microsoft, to be run by current Skype CEO Tony Bates. He will report directly to Microsoft boss Steve Ballmer.

Luxembourg-based Skype began life as a VC-backed company, before being acquired by eBay (EBAY) for $2.6 billion in 2005. The combination didn’t quite work out, and eBay gave public thought to either selling the unit outright or spinning it off into an independent public company. In November 2009, it agreed to sell a 65% stake in Skype for $1.9 billion to an investor group that included Silver Lake Partners, Andreessen Horowitz, and Canada Pension Plan Investment Board (the 7th-largest leveraged buyout of 2009).

Skype then filed for a $100 million IPO last August.  The company reported a $6.9 million net loss in 2010, on nearly $860 million in revenue. It reported just $686 million in long-term debt, and just over $1 billion in liabilities.

A couple quick thoughts, as details continue to come in:

1. This is, obviously, a remarkable return for the PE/VC firms that carved out Skype in November 2009. Not just cash-on-cash, but also IRR (which takes length of investment into account). Remember, this was a very controversial deal at the time. Pretty sure the term “hairy” was used more than once. There were questions as to whether Skype’s problems should be pinned on eBay or were inherent, and there were subsequent lawsuits from the company’s founders (who ultimately received a small ownership stake). Moreover, this was the single-largest check ever written by Silver Lake, and the first time that Andreessen Horowitz — a very new firm at the time — had done something that didn’t look at all like traditional venture capital. OH, and the buying group guaranteed the leveraged loans (which is very unusual)

2. Remember all that talk that Microsoft was on the M&A sidelines? Pretty sure that will be tamped down for a bit. After all, this is the largest acquisition in company history. d this clearly will improve the value proposition of Microsoft devices like XBox and Kinect.

3. The price-tag suggests that eBay made a shrewd move in holding onto a large Skype stake, rather than selling the entire thing in 2009.

UPDATE: The deal is now official. Here is the press release.