Microsoft today confirmed it will buy internet phone service Skype for 8.5 billion US dollars (£5 billion) in the software giant's biggest ever takeover deal.
Luxembourg-based Skype, which allows its 663 million users to make voice or video calls over the internet, will become a new business division within Microsoft after its private owners agreed to sell the business.
The hefty price tag is likely to raise eyebrows as Skype's former owner, online auctioneer eBay, sold 70% of the reportedly loss-making business for 2 billion US dollars (£1.2 billion) just two years ago.
The value of the deal overtakes Microsoft's successful bid for online advertising agency aQuantive in 2007 for 6 billion US dollars (£3.6 billion).
Skype is popular for its free calling services, which can be made to other Skype users, and has around 8.8 million paying customers per month.
The amount of call time on Skype's network totalled 207 billion minutes last year, according to regulatory documents.
The popularity of the free calls has made it difficult for the company to make money since it was founded by entrepreneurs Niklas Sennstrom and Janus Friis.
City analysts earlier questioned the size of the bid price as the company made a 7 million US dollars (£4.2 million) loss last year on revenues of 860 million US dollars (£525 million).
A Skype sale has been speculated upon for weeks, with Google and Facebook also rumoured to be interested.
Skype was bought by eBay for 2.6 billion US dollars (£1.5 billion) in 2005 but it sold a 70% stake to private equity firms Silver Lake and Andreessen Horowitz for 2 billion US dollars (£1.2 billion).
Other major shareholders include tech-firm Joltid and the Canada Pension Plan Investment Board.
Speaking at a press conference this afternoon, Microsoft chief executive Steve Ballmer said his company made the decision to buy Skype in mid-April after it held partnership discussions with the group.
"We decided it was in our best interest to own the group and made an unsolicited approach to Silver Lake," he said.
The plans are to link it with Microsoft's other core products such as Outlook, Xbox and its Windows phone.
Mr Ballmer said Skype's video capability was a natural fit with Outlook's existing email and messaging functions.
The chief executive confirmed Microsoft would also continue to support Skype's multi-platform approach so it will still be made available on products made by rivals such as Apple and Google.
Skype boss Tony Bates, who will become Microsoft Skype division's president once the deal is completed, said this commitment to support Skype across different platforms was fundamental to the deal being agreed.