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Microsoft completed the largest acquisition in its history overnight, paying $8.5 billion for online communications company Skype a week after receiving European regulatory approval for the deal.

The acquisition is the latest attempt by Microsoft to find its footing online, where it has historically struggled to make money. The Redmond company already has technology similar to Skype’s services for video calling and messaging, but Microsoft CEO Steve Ballmer is banking on Skype’s popularity to boost Microsoft’s prospects.

Skype has 170 million active users, and many of them use its name as a verb — a status coveted by tech companies.

“Skype is a phenomenal product and brand that is loved by hundreds of millions of people around the world,” said Ballmer in a news release announcing the completion of the acquisition.

Skype isn’t without challenges. The Luxembourg-based company posted a net loss of $7 million on revenues of $860 million in 2010, according to financial statements released by Skype prior to the announcement of the Microsoft acquistion, when it was planning an initial public offering.

Microsoft’s Online Services Division, by comparison, reported a net loss of more than $2.5 billion in the company’s latest fiscal year, as Microsoft spent heavily on distribution deals and partnerships in its quest to catch Google in online search.

Microsoft's Steve Ballmer and Skype's Tony Bates announce the $8.5 billion acquisition in May. (Photo: Microsoft)
Many of Skype’s core services are free, including its widely used video chat feature. Skype’s primary source of revenue is from its paid Skype Out service for making Internet calls to traditional landline and mobile phone numbers. But that feature is facing increasing competition. Just last week T-Mobile USA launched a free rival.

Announcing the completion of the acquisition, Microsoft said Skype over time will be “integrated across an array of Microsoft products to broaden Skype’s reach and accelerate its growth as a fundamental way people communicate online.”

Microsoft and Skype had originally announced the deal in May. Skype now becomes a division of Microsoft, with its CEO, Tony Bates, reporting to Microsoft CEO Steve Ballmer as divisional president. Microsoft says Skype employees will continue to be based around the world, in Europe, Asia and the U.S. Skype had 911 employees as of December.

In a video and blog post about the news, Bates says Microsoft will continue to offer Skype on a variety of platforms.

“I’m sure on a lot of people’s minds post-merger is the question, will the Skype experience change? The answer is an emphatic no,” he says in the video. “The value proposition of Skype is being multi-platform across different devices, whether it’s PCs, desktops, mobile phones, whether it’s in the living room. That’s key and that must stay. We’re committed to that.”

As he says those words, the video first shows Skype launching on a MacBook Pro, and then on an iPhone. On a new Microsoft page about the deal, the company says, “Windows, Mac, Android, iPhone, iPad or TV – Skype works with them all.”

Update: Microsoft isn’t being completely magnanimous. As noted by tech blog WinRumors, Skype for Windows has just been updated to remove “Google product bundling.” The Skype installation tool previously put a version of the Google Toolbar on users’ computers.

Also in the video, Bates talks about the plans for Skype inside Microsoft …

When I think about what we can do together, I get really excited. The mission we have at Skype is to really transform communications for not just hundreds of millions but billions of people, so they can all have this incredible experience. When I think about the two companies and what we can do together, the assets, the technology, the way each company pushes forward with disruptive innovation, I see us reaching that goal and reaching that goal quickly.

If I had a crystal ball for our customers, our community, the world I see in a few years is really one of complete, pervasive video communications — something that’s across all parts of your life, not just as an appointment, but something that you use each and every day and becomes seamless.

Microsoft and Skype signaled the completion of the deal on Twitter late Thursday night.

“Hey @Skype: Should we do this thing?” tweeted Microsoft from its corporate account.

“Yeah. @Microsoft: Let’s flip the switch!” replied Skype before they both announced it was official.

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