Microsoft has confirmed that it has agreed to buy internet phone service Skype.

The deal will see Microsoft pay $8.5bn (£5.2bn) for Skype, making it Microsoft's largest acquisition.

Luxembourg-based Skype has 663 million global users. In August last year it announced plans for a share flotation, but this was subsequently put on hold.

Internet auction house eBay bought Skype for $2.6bn in 2006, before selling 70% of it in 2009 for $2bn.

This majority stake was bought by a group of investors led by private equity firms Silver Lake and Andreessen Horowit.

Other major shareholders include tech-firm Joltid and the Canada Pension Plan Investment Board.

Shares in Microsoft ended the day in New York down 0.5% at $25.68. In contrast, eBay - which owns a stake in Skype - saw its share price rally 2.5%.

'Defensive move'

Microsoft chief executive Steve Ballmer said: "Skype is a phenomenal service that is loved by millions of people around the world.

Analysis It's a done deal: Microsoft has bought Skype for a whopping $8.5bn. That's a lot of cash for an eight-year-old company that's not making a lot of money. So what's in it for Microsoft? For starters, the firm gets well over 600 million users who make Skype the world's largest phone company for international voice calls. More importantly, Microsoft buys into a lot of potential. Marry Skype's software with the Xbox Kinect and an HD television set, and Microsoft can make a powerful argument for getting into millions of living rooms. Think beyond teleconferencing for the whole family: there's one-on-one training, home schooling, even patient care delivered remotely and in vision. Smarten it up for the corporate world, and Microsoft can challenge the telepresence business of firms like Cisco and Polycom. And Skype is multi-platform, reaching into the worlds of Apple and Linux. Finally, Skype is mobile, and can be paired with Windows Phone 7. The hitch: Microsoft boss Steve Ballmer will have to work hard to integrate Skype, to ensure the voice/video-over-the-internet company is not strangled by his firm's notorious bureaucracy.

"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."

Skype will now become a new division within Microsoft, and Skype chief executive Tony Bates will continue to lead the business, reporting directly to Mr Ballmer.

"It's a strategic asset and a defensive move [for Microsoft]," said Colin Gillis, an analyst at BGC Financial.

"If they can put it on Windows 8, it gives them an advantage. It helps them in the tablet market."

Other analysts say Microsoft's aim in buying Skype is to improve its video conferencing services.

Price concerns

Although the price tag of $8.5bn will not stretch the US giant, some experts have questioned whether it is paying too much for a company that has struggled to turn a profit.

Michael Clendenin, managing director of consulting firm RedTech Advisors, said: "If you consider [Skype] was just valued at about $2.5bn 18 months ago when a chunk was sold off, then $8.5bn seems generous.

"[It] means Microsoft has a high wall to climb to prove to investors that Skype is a necessary linchpin for the company's online and mobile strategy."

This view was echoed by Ben Woods, head of research group CCS Insight.

"The big unanswered question is how do Skype assets work for Microsoft... how do you justify the price?" he said.

Skype was founded in 2003.

Calls to other Skype users are free, while the company charges for those made to both traditional landline phones and mobiles.