By Alexei Oreskovic and Gerry Shih
SAN FRANCISCO, April 9 Facebook will pay $1
billion in cash and stock for Instagram, a 2-year-old
photo-sharing application developer, in its largest-ever
acquisition just months before the No. 1 social media website is
expected to go public.
The price was stunning for an apps-maker without any
significant revenue, even with soaring startup valuations in
Silicon Valley, as Facebook sought to absorb a potential rival
or at least prevent it from falling into the hands of a major
competitor like Twitter or Google.
As Instagram's popularity has shot up in recent months, the
company's leadership has mulled possible strategies to expand
the service into a fully featured social network - much like a
photo-driven, stripped-down version of Facebook, Twitter, or
even Path, a company insider said.
Instagram is "a property that would have been amazingly
valuable to not just Facebook, certainly Twitter was in the hunt
as well," said Lou Kerner, founder of the Social Internet Fund.
"I'm sure Google was interested as well. So to some degree
an acquisition like this is both offensive and defensive. It
would be a highly leveragable asset for anybody who wanted to
compete against Facebook."
The acquisition marks an exception in strategy for Facebook,
which has traditionally bought small companies as a means of
hiring coveted teams of engineers. Facebook typically
discontinues the acquired company's products or builds similar
versions that it integrates into its service.
Instagram, however, will not only remain running, but
Facebook will build features into it as time goes by, both
The Instagram application, which allows users to add filters
and effects to pictures taken on their iPhone and Android
devices and to share those photos with their friends, has gained
about 30 million users since it launched in January 2011.
Instagram, with roughly a dozen employees based in San
Francisco, was reportedly in the process of wrapping up a $50
million funding round last week from investors including Sequoia
Capital, according to the technology blog AllThingsD.com. The
funding valued the company, founded in early 2010, at $500
million, it said.
Facebook, which is expected to raise $5 billion via the
largest Silicon Valley initial public offering by May, will
acquire Instagram's entire team.
"This is an important milestone for Facebook because it's
the first time we've ever acquired a product and company with so
many users," Facebook CEO Mark Zuckerberg said in a blog post.
"We don't plan on doing many more of these, if any at all."
The deal, a closely kept secret at the tiny start-up, is
expected to close this quarter. CEO Kevin Systrom announced the
transaction to Instagram employees at a 9 a.m. meeting on
Monday, according to the source inside Instagram.
TAKING PAGE FROM GOOGLE'S BOOK
The Instagram deal is expected to resemble Google Inc's
$1.65 billion acquisition of video service YouTube in
2006. YouTube retains its own offices in San Bruno, California,
and largely operates independently of Google.
The acquisition came as Instagram was in the process of
meeting with venture capital firms about raising more funding,
according to one source familiar with the matter.
"It was not long-planned," the source said on condition of
anonymity, referring to the Facebook acquisition. "What happened
is that Facebook must have come in with a number."
In addition to bolstering Facebook's photo-sharing and
mobile capabilities, one side benefit of the deal for Facebook,
the source noted, is that it prevents rival Twitter from
acquiring the popular app.
With its purchase, Facebook said it would continue to
develop Instagram as an independent app that remains compatible
with other social networking services.
"We plan on keeping features like the ability to post to
other social networks, the ability to not share your Instagrams
on Facebook if you want, and the ability to have followers and
follow people separately from your friends on Facebook,"