UPDATE: Microsoft confirms deal, buys Skype for US$8.5billion

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In what might be the biggest acquisition in the company’s history, Microsoft has confirmed that it will buy Skype for US$8.5 billion in cash, allowing Microsoft to have a better footing in the real-time communications market and expand on its services.

Microsoft plans to use Skype’s intellectual property in order to improve its various platforms with Office Lync, its own competitor; Outlook, Windows Live Messenger and Hotmail, and – what could be its big success – on Xbox LIVE.

“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,” Steve Ballmer, Microsoft’s CEO, said in its statement.

“Microsoft and Skype share the vision of bringing software innovation and products to our customers. Together, we will be able to accelerate Skype’s plans to extend our global community and introduce new ways for everyone to communicate and collaborate,” Skype’s CEO Tony Bates said.

It also plans to expand Skype onto its own devices – including the Xbox and Kinect, and on its Windows Phone OS. It will also continue to support and improve on other Skype clients on non-Microsoft platforms, including the Mac, Linux, iPhone and Android versions of its client.

Microsoft’s price tag is very large, but with Google and Facebook likely to be successful bidders, maybe it was to beat out the others.

However, the big question is – and Kara Swisher from All Things D notes – how will Microsoft make a profit? While the success of Bing, the entire online division in Redmond still continue to lose money. Windows Live still continues to be a lesser part of the company. As well, the price has also been questioned. Previous owner eBay bought it for $2.6 billion before selling a 70 percent stake and wrote down the value by $1.4 billion.

This isn’t the only time Microsoft has made impressive bids – it bought aQuantive Inc, which became its online advertising platform AdCenter. However, many former and current executives – according to WSJ, believe it was too much. As well, it made a bid for Yahoo valued at $48 billion, before pulling out after the executives at Yahoo rejected the bid.

However, that turned to be a costly mistake for Yahoo, with its market share dwindling and value halved. It recently handed off its search engine platform to Microsoft and its popular Bing search engine; sold off Delicious to the founders of Yahoo and are more likely to shut down existing services and acquisitions in order to slim down the company.

Also amongst concerns was the internal battle on whether it will go to its Office or Online Services division. However, Microsoft has decided to take the third option – create a brand new division within the company, dubbed the “Microsoft Skype Division”. This most likely will allow it to be more flexible with its relations with other divisions inside the company, and also reflects how important Skype is to Microsoft.

Bates will become president of the new division and will report directly to Ballmer.

The deal faces regulatory approval from both the United States and the European Union. Boards for both companies have already approved the deal.