Microsoft Corp. has made the biggest deal in the software maker's 36-year history: an $8.5-billion US offer for popular internet telephone service Skype.

The purchase price for the deal, which has been approved by the boards of both companies, would include debt. At that price, the Skype takeover tops Microsoft's biggest previous acquisition — a $6-billion purchase of the online ad service aQuantive in 2007.

What is Skype?

Launched in 2003, Skype allows users to talk to each other via voice, text or video with another user, anywhere in the world, over the internet. It is typically used on personal computers but updated versions permit the service over televisions equipped with internet access, and most significantly, smartphones.

The basic model is free, but users willing to pay are granted extra abilities, such as being able to call telephones. The smartphone market is a major focus for the company, as the ability to make long-distance phone calls without paying cellular providers is proving to be a popular option with consumers.

The Canada Pension Plan Investment Board is a major investor in Skype, part of the Silver Lake-led consortium that bought two-thirds of the company from eBay in late 2009. EBay itself paid roughly $3 billion for the entire company in 2005.

The $1.9-billion 2009 buyout valued Skype at $2.75 billion at the time. The ownership breakdown has changed since then, but CPP paid $300 million for its initial stake. If the overall value of the company has gone from $2.75 billion to $8.5 billion, that suggests CPPIB's stake has tripled in value since then.

A spokesperson for the pension plan confirmed via email that the fund stands to bank $930 million for their initial stake if the sale goes through.

"We have also invested $50 million US in Skype through a Silver Lake Fund that will also more than triple in value, to $155 million," the spokesperson said. "However, because it is a fund, there will be fees and interest … to account for, so we can’t provide an exact number on what we will net [from that]."

Microsoft's mobile strategy

Buying Skype would give Microsoft a potentially valuable communications tool  as it tries to make a bigger splash on the internet and become a bigger force in the increasingly important smartphone market.

Skype boasts about 663 million users worldwide who make voice and video calls over the internet. The amount of calling on Skype's network totalled 207 billion minutes last year, according to regulatory documents.

Most people use Skype's free calling services, a penchant that has made it difficult for the service to make money since entrepreneurs Niklas Zennstrom and Janus Friis started the Luxembourg company in 2003.

Skype lost $7 million on revenue of $860 million last year, according to papers the company has filed since announcing its intentions last summer to launch an initial public offering of stock. The IPO, however, has been in a holding pattern. An average of about 8.8 million customers per month pay to use Skype services. Though profitability remains elusive, Skype CEO Tony Bates said Tuesday that the company's revenues are growing by 20 per cent per year.

P.O.V.:

What kind of telephone service do you use most? Take our online survey.

Although it makes billions from its computer software, Microsoft has been accustomed to losing money on the internet in a mostly futile attempt to catch up to Google Inc. in the lucrative online search market. Microsoft got so desperate that it made a $47.5-billion bid to buy Yahoo Inc. three years ago, but withdrew the offer after Yahoo balked. Yahoo is now worth about half of what Microsoft offered.

The company also likely sees the acquisition as a way of beefing up its XBOX Live console system into a fully interactive home entertainment centre. Though the company could have tried to develop a competing video conferencing capability in-house, a base of 663 million Skype users was too appealing to ignore.

"We're familiar with them and we've been talking for a while about other partnerships," Microsoft CEO Steve Ballmer said at a press conference to discuss the deal Tuesday. "Our vision is that products and services that Skype users know and love will simply grow and be advanced."

Since hiring former Cisco Systems Inc. executive Tony Bates as its CEO last year, Skype has explored joint ventures or an outright sale with Google Inc. and Facebook, according to unverified reports in newspapers and blogs.

With files from The Associated Press