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Microsoft Corp plans to buy Internet phone service Skype for $8.5 billion in cash in the quest of it’s effort to regain ground on growing rivals such as Google.

Microsoft’s interest in the money-losing but popular service highlights a need to gain new customers for its Windows and Office software.

Skype has 145 million users on average each month and has gained favor among small business users.

Many say that it doesn’t make sense at all as a financial investment… There’s no way Microsoft is going to generate enough revenue and profit from Skype to compensate.

The sale marks a big payday for Skype’s owners, online auction site eBay, Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz. Skype delayed plans for an IPO that was expected to value the company at more than $3 billion. It had been looking at other options, including tie-ups with Facebook and Google. Such a deal was expected to value Skype at $3 billion to $4 billion.

Some technology analysts believe Microsoft overpaid for this purchase, particularly since Skype had operating profits of $264 million last year but a small loss ($7 million) overall and carries long-term debt of $686 million, according to published reports. However, the acquisition brings the software giant several benefits in addition to Skype’s 170 million members. While Microsoft already has several real-time communication vehicles, this purchase gives it a firmer foothold in global telephony and Web-based communications.

Skype allows people to make calls at no charge but has also developed premium services, would give Microsoft a foothold in the potentially lucrative video-conferencing market as businesses shift to lower-cost ways of communicating.

Skype could be combined with Microsoft software such as Outlook to appeal to corporate users, while the voice and video communications could link to Microsoft’s Xbox live gaming. In long run Skype would offer Microsoft another route to develop its mobile presence, an area it has already put more energy and resources into as PC usage comes under threat.

Skype is set to become a new business division within Microsoft with Skype CEO Tony Bates in charge and reporting directly to Microsoft CEO Steve Ballmer. Microsoft shares were down 13 cents, or 0.5 percent, at $25.70 in early Nasdaq trading. The Skype deal is the biggest in the 36-year history of the world’s largest software company.

The $8.5 billion price tag was a surprise. Although the sum would not stretch cash-rich Microsoft, some said it was high for a company whose ownership has changed several times during its relatively short life.

In the age of Internet Bubble 2.0, picking up an unprofitable online company for roughly 10 times sales probably seems downright cheap. But what bout $2.5 billion 18 months ago when a chunk was sold off, then $8.5 billion seems generous and means Microsoft has to prove that the decision holds good for it’s online and mobile strategy.

Skype, which was formed in 2003, was bought by eBay Inc in 2005 for $3.1 billion. Last year it had in $860 million in revenue but posted a net loss of $7 million, according to data in its initial public offering filing. In 2009, eBay sold a majority stake in Skype to the investor group for $1.9 billion in cash and a $125 million note. EBay retained about a third. Microsoft’s Ballmer said his company did not use Wall Street advisers on the deal, approaching the investor group that owns Skype directly.