Microsoft is in advanced talks to acquire Skype, which revolutionized telephone calls over the Internet, for $8.5 billion, according to people involved in the transaction.
A deal is expected to be announced on Tuesday morning, these people said, although they cautioned that negotiations could still fall apart.
The acquisition would be Microsoft's largest ever and it is an effort to gain a foothold in the world of voice and video communications. Microsoft would be able leverage Skype's more than 600 million registered users into using its other Internet products like Bing, its search engine, which competes with Google. It may also be used to bolster Microsoft's fledging mobile telephone offering, which lags far behind Apple's iOS and Google's Android operating systems. And Skype is likely to integrate into Microsoft's flagship product, Office, as a way for business users to better collaborate.
The deal would end months of speculation in Silicon Valley about Skype's future. The company had been planning an initial public offering but put those plans on hold last year leading to persistent rumors that it may be sold to an Internet giant like Facebook or Google.
Skype burst onto the scene in 2003 and has long been seen as a challenger to the telephone companies because it can route phone calls - and now video calls -- over the Internet for free or for a nominal fee. Most telephone carriers have to come to accept Skype, but do see it as a potential threat. It is unclear how wireless carriers that support handsets with Microsoft's operating system will view the deal and how tightly Microsoft will seek to integrate Skype into its mobile system.
Microsoft, analysts say, is making a move to block Google from gaining greater ground in Internet communications. Microsoft is expected to give Facebook access to Skype communications, as well as fold some of that capability into its online voice communications in Microsoft Office.
"This is part of the strategic fight between Microsoft and Google," said Rob Enderle, an independent technology analyst.
Facebook, Mr. Enderle noted, has a large market value, but not the cash to do deals as Microsoft does. "Microsoft is backing Facebook's play, and to some degree entering this fight on Facebook's side of this strategic confrontation with Google," he said.
If a deal is reached, it would mark the second time a big technology company has acquired Skype. The company was bought by eBay in 2005 for $2.6 billion with hopes of tightly integrating the service into eBay as a sales tool.
But the deal never lived up to its promise and eBay took a $1.4 billion write-down on its investment. Skype was sold in 2007 to a consortium of investors led by Silver Lake Partners, Index Ventures, Andreessen Horowitz and the Canada Pension Plan Investment Board. Marc Andreessen of Andreessen Horowitz, who co-founded Netscape Communications, was seen as a pivotal matchmaker for Skype, at one point trying to put it together with Facebook, another company on which he is on the board, according to people involved in the discussions.
Goldman Sachs and JPMorgan Chase are advising Skype.