Growth in Skype's connected users over the past four years. (Skype graphic)

Microsoft’s $8.5 billion agreement to acquire Skype, the largest deal in the Redmond company’s history, will create the smallest major business division in its corporate lineup. But it will also add a large base of customers and a widely recognized online brand — familiar enough to be used as a verb — with the potential to be integrated into many of Microsoft’s existing products.

Although the deal appeared from the outside to practically come together over the weekend, a source familiar with the acquisition tells GeekWire this morning that Microsoft CEO Steve Ballmer actually made an initial, unsolicited bid for Skype in March. Silver Lake, the lead Skype investor, accepted an offer from Microsoft in April, and they signed the deal last night.

Google was also reportedly in talks with Skype about a partnership or acquisition, and the premium appears, in part, to reflect Microsoft’s desire to keep Skype out of the hands of a rival.

Ballmer will be banking on Skype’s consumer traction and the potential to bolster Microsoft’s lineup as he tries to justify the massive premium his company is preparing to pay. He’ll start making the case shortly, during a news conference that begins at 8 a.m. in San Francisco — not coincidentally very convenient for the technology press that would otherwise have been filing into Google’s I/O conference around the same time not far away.

Skype last year registered a loss of $7 million on revenues of $860 million, with fewer than 1,000 employees — a fraction of the size of any of Microsoft’s five existing major business divisions. At the same time, Skype’s reported number of average monthly connected users rose by 38 percent last year, to 145 million. About 8.8 million of them were paying users, mostly people who use SkypeOut to connect to traditional phone lines.

Those numbers come courtesy of Skype’s IPO filing — which will be now be scrapped as a result of the Microsoft deal.

By comparison, Microsoft’s Windows and Windows Live Division posted profits of $13 billion last fiscal year, on revenues of $18.5 billion. The company’s smallest division, Online Services, reported a loss of $2.4 billion on revenue of $2.2 billion.

Microsoft is expected to say during the news conference that the Skype deal to be acretive this year, meaning that it will add to the company’s earnings, not counting costs associated with the acquisition.

The company said this morning that Skype would become a new business division inside Microsoft, led by Skype CEO Tony Bates as the division’s president, reporting to Microsoft CEO Steve Ballmer. However, the company hasn’t yet determined whether the Skype division will be broken out as a separate unit for purposes of financial reporting and corporate earnings summaries.

Stay tuned for more on the Skype deal throughout the day on GeekWire.

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  • Bob

    “Microsoft is expected to say during the news conference that the Skype deal to be acretive this year, meaning that it will add to the company’s earnings, not counting costs associated with the acquisition”

    I think he said accretive in year one after the transaction closes. So not this year, and of course that remains to be seen. There’s also no indication of how accretive, which would be critical to determining if the deal makes any sense and over what time period.

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