Update: Microsoft agrees to buy Skype for $8.5 billion

IDG News Service - Microsoft has agreed to buy Skype for $8.5 billion, the companies announced Tuesday.

The companies' CEOs, Steve Ballmer and Tony Bates, will host a press conference later Tuesday to give details of the acquisition.

The boards of both companies have agreed to the deal, which will see Bates reporting directly to Ballmer as president of the Microsoft Skype division, illustrating the importance of the deal to the company.

Once the merger is complete, Microsoft plans to add Skype support to its Xbox and Kinect gaming devices and Windows Phone mobile operating system, and connect Skype users with its own Lync, Outlook and Xbox Live communications services.

Over the last week, the voice and video communications company had been rumored to be discussing an acquisition or partnership with Cisco, Facebook and Google.

Founded by Niklas Zennström and Janus Friis, Skype was bought by eBay in 2005. After that company failed to figure out how to integrate it with its online auction business, it sold a majority stake to an investment consortium including its founders and Silver Lake in 2009.

Skype made a name for itself offering free voice calls from PC to PC, charging to connect calls between PCs and the public telephone network. Later it added video chat and, more recently, software clients for smartphones.

Microsoft offered a similar PC-to-phone service for consumers under the Windows Live Call brand, and continues to offer PC-to-PC text, voice and video chat with its Windows Live Messenger service.

Skype and Microsoft also target businesses with their communications offerings. Microsoft has a server-based unified communications tool that connects PCs to a PBX to offer VoIP calling, instant messaging and videoconferencing.

Previously called Communications Server, it is now branded Lync, while Lync Online is a cloud-based service offering similar functionality.

Skype Connect, meanwhile, is a service that allows businesses to connect their PBX to Skype to handle incoming and outgoing calls. A management tool, Skype Manager, allows businesses to control call costs.

Peter Sayer covers open source software, European intellectual property legislation and general technology breaking news for IDG News Service. Send comments and news tips to Peter at peter_sayer@idg.com.