SAN FRANCISCO (Reuters) - 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 companies said.
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.
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," Zuckerberg wrote.
Reporting by Alexei Oreskovic and Gerry Shih; Editing by Edwin Chan, Lisa Von Ahn and Richard Chang