Facebook Acquires Instagram for $1 Billion in Cash

Joel Anderson  |

Apparently there's a lot of money in hipsters taking quirky photographs. Now the only real question is whether or not Instagram can get their check in sepia tones.

Facebook (FB), as it approached its much ballyhooed IPO, most likely in the next month, has snapped up Instagram in the biggest purchase of an app in history.

Facebook Buys up Potential Competitor

The considerable price that Facebook has paid for Instagram dwarfs the previous prices paid for apps. The previous record was the $200 million that Zynga (ZNGA) paid for OMGPop just last month. The $1 billion means a massive payday for Kevin Systrom, Instagram's founder and CEO, and represents $76 million for each of the company's 13 employees.

“It’s unprecedented on almost any metric you look at,” said Paul Kedrosky of the Kauffman Foundation.

The purchase of Instagram represents a significant move for Facebook, which may have viewed Instagram as a significant competitor. Instagram was growing very quickly, picking up 1 million users a month for its droid app and 25 million for its IOS app.

“It was not just a photo-sharing app. It was a way that people were communicating with each other the same way they might have on Facebook,” Kedrosky said. “Facebook saw it as a fast-growing competitor.”

Big Move for Facebook

"We will try to learn from Instagram's experience to build similar features into our other products," Mr. Zuckerberg said in a statement. "At the same time, we will try to help Instagram continue to grow by using Facebook's strong engineering team and infrastructure."

The purchase of Instagram could represent some major shifts for Facebook as it ramps up for its IPO. Firstly, it appears as though Facebook is pushing towards expanding its presence on mobile platforms. It's also a very prominent acquisition, snapping up perhaps the most prominent "free agent" social networking company outside of Twitter.

"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," Mark Zuckerberg said in a blog post

It could also ring in a new period of acquisitions for Facebook. With an influx of capital that some predict could be as high as $10 billion anticipated to come in with the IPO, Facebook will be in a position to buy up companies that could have personnel and/or technology that would be valuable to Facebook.

"Facebook after this IPO is going to be in a position to be predatory. They can make sure no one steps in their way and buy anyone who gets in their way," said Michael Pachter, an analyst Wedbush.

Some, though, believe that Facebook's purchase was primarily motivated by wanting to eliminate a burgeoning competitor.

“In many ways, Facebook would rather not have done this. It creates a mess for them with having to issue an amended S-1 with this highly material transaction,” Kedrosky said. “What that tells you is that Facebook felt like it had to do the deal.”

Zuckerberg, yesterday announced the acquisition as an update to his Facebook status:

"I'm excited to share the news that we've agreed to acquire Instagram and that their talented team will be joining Facebook.

For years, we've focused on building the best experience for sharing photos with your friends and family. Now, we'll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests.

We believe these are different experiences that complement each other. But in order to do this well, we need to be mindful about keeping and building on Instagram's strengths and features rather than just trying to integrate everything into Facebook.

That's why we're committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.

We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience. 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.

These and many other features are important parts of the Instagram experience and we understand that. We will try to learn from Instagram's experience to build similar features into our other products. At the same time, we will try to help Instagram continue to grow by using Facebook's strong engineering team and infrastructure.

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. We don't plan on doing many more of these, if any at all. But providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together.

We're looking forward to working with the Instagram team and to all of the great new experiences we're going to be able to build together."

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