Software giant Microsoft is close to buying leading Internet phone company Skype Technologies SA for a deal valued at over $7 billion, according to sources close to the development.

The Wall Street Journal said negotiations were close to wrapping up by Monday evening and a public announcement could be made as early as Tuesday morning.

Microsoft and Skype, however, are tight-lipped about the matter as the deal has not yet been confirmed and could fall through any moment.

Skype is a forerunner in Internet telephony business with over 663 million users around the world. During 2010, Skype users logged 207 billion minutes of voice and voice video calls.

Buying Skype would help Microsoft, which is struggling against rivals like Google and Yahoo for winning the confidence of Web-savvy consumers.

However, one questions the merits of the deal as Skype won't be able to help Microsoft gain much traction in search engine market, which is dominated by Google, albeit inroads made by Microsoft's Bing search engine.

Some analysts are also wondering whether Microsoft is overpaying for Skype as its last big-pocket deal was in 2007, when it bought online advertising firm aQuantive Inc for approximately $6 billion. Microsoft had offered to buy Yahoo Inc. for $48 billion nearly three years ago but that deal fell through.

Moreover, Skype's financial report is a mixed bag - last year the company reported revenue of $860 million and $264 million in operating profits, but still lost $7 million. The company also had $686 million in long-term debt as of Dec. 31.

Adding to that is the fact that Microsoft already has voice and video chat in Windows Live Messenger for consumers

So why would Microsoft want to buy Skype for the princely sum?

The answer probably lies in the mobile phone market. Industry watchers feel that Skype will be able to help propel Microsoft in the mobile phone market, which is dominated by Apple Inc and Google. Last year, Microsoft launched a new mobile operating system called Windows 7. It received kudos from technology pundits but surprisingly has failed to improve Microsoft's market share. But Skype could change all that as it can be integrated well into its mobile software. And, with Nokia accepting Windows 7 as the standard software platform for its smartphones, things can only look better for Microsoft.

Moreover, if Microsoft can successfully integrate Skype with Exchange and Microsoft's other communications tools such as corporate messaging service Lync, it would give Microsoft users more incentive to stick with its products

However, there's many a slip between the cup and the lip and so Microsoft better not let this deal slip away through its fingers because with Facebook, Google and others lurking in the corner, it will not get a second chance.