Facebook Agrees to Buy Instagram for $1Billion

April 10, 2012 Facebook Twitter LinkedIn Google+ News

Facebook Inc. (FB), the biggest social- networking service, is buying the Instagram mobile photo-sharing application for about $1 billion in cash and stock, using its biggest acquisition yet to lure users of mobile devices.

Instagram, owned by San Francisco-based Burbn Inc., was valued at $500 million after raising about $60 million last week from investors including Sequoia Capital, said people with knowledge of the funding who asked not to be identified because the matter is private. The acquisition is expected to close this quarter, Menlo Park, California-based Facebook said today.

Instagram lets users take pictures with smartphones, retouch them with borders and filters, and then post the images on social networks. Founded in 2010, it has become the most popular free photo-sharing application on Apple Inc. (AAPL)’s App Store and boasts more than 30 million users. Owning it may help Facebook attract handset users and advertisers who target them, said Rebecca Lieb, an analyst at Altimeter Group LLC.

“In order to monetize mobile, Facebook needs a lot more mobile participation,” said Lieb, who is based in New York. “What they bought with Instagram was a photo app with high brand recognition and an enormous audience.”

Given Instagram’s employee base of 13, Facebook is paying $76.9 million per person for a company that has no publicly disclosed source of revenue. Facebook may seek an initial public offering valuation of as high as $100 billion, people with knowledge of the plans have said. At that valuation, Facebook would be worth $31.3 million per each of its 3,200 employees at the end of 2011.

Keep-Away From Google

Facebook paid a high premium in part to keep a popular mobile tool out of the hands of a different social-networking provider, such as Google Inc. (GOOG), said Ray Valdes, a research director at Gartner Inc.

“The value really is not what Instagram is, but what Instagram could have been in the hands of competitor,” Valdes said. “That’s the reason why the valuation was so high.”

The deal marks the first time Facebook has acquired a product and company with so many users, Chief Executive Officer Mark Zuckerberg wrote on his profile page. The company also announced the transaction on its website.

Facebook, which intends to raise $5 billion in the biggest IPO of an Internet company, says it plans to let Instagram remain independent.

Instagram Independence

“We need to be mindful about keeping and building on Instagram’s strengths and features rather than just trying to integrate everything into Facebook,” Zuckerberg wrote. “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.”

Instagram was introduced in October 2010 by Kevin Systrom and Mike Krieger. Building on its popularity among iPhone users, last week the company added an application for devices that use Google’s Android operating system. Systrom didn’t respond to a request for comment on last week’s funding round, reported previously by blogs AllThingsDigital and TechCrunch.

Instagram received seed funding of about $500,000 from Andreessen Horowitz and Baseline Ventures in 2010. It raised a $7 million round in 2011, when it had 1.75 million users, from Benchmark Capital and a group of angel investors including Twitter Inc.’s Jack Dorsey and Quora Inc.’s Adam D’Angelo.

The startup closed its most recent financing just days before Facebook’s purchase was announced, the people with knowledge of the matter said.

Apple Startup Help

The purchase extends the role of Apple’s App Store as a platform for building companies, said Carl Howe, an analyst at Yankee Group. It may also be the largest purchase price for an app built for the App Store, he said.

“You’re going to see valuations in app companies in general be a little surprising,” Howe said.

Many of Instagram’s backers have close ties to Facebook, including Marc Andreessen, who sits on the board of the social network, and Benchmark general partner Matt Cohler, who was one of Facebook’s earliest employees and worked as a senior vice president of product management there until 2008. He remains a special adviser to Facebook CEO Zuckerberg.

Systrom himself once received a job offer from Zuckerberg in the early days of Facebook and turned it down.

“I decided I wanted to stay in school,” Systrom told Fast Company magazine last year. “That’s one of those decisions that I look back at — I would’ve loved to have been part of Facebook’s growth over the years.”

Nike, Tiffany

Marketers including Nike Inc., Tiffany & Co. and Burberry Group Plc have begun using Instagram to promote products using photos, Lieb said. Gap Inc.’s Banana Republic unit held a contest on the site asking users to submit pictures of their New Year’s Eve outfits for a chance to win a trip to New York City.

“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,” Zuckerberg said.

Facebook has a history of acquiring small companies with highly-regarded talent. It has bought e-book publisher Push Pop Press Inc. and mobile messaging app Beluga Inc. since the beginning of 2011. It also hired the staff of location check-in service Gowalla Inc.

“Two years ago we didn’t have a track record in acquisitions,” Vaughan Smith, Facebook’s director of corporate development, said in an interview with Bloomberg last year. “While we expected them to work well, it was still a crapshoot how they’d turn out. We’ve built a culture that supports entrepreneurs, and it’s working incredibly well.”

When the company filed to go public in February, it told investors that its lack of experience in large acquisitions could pose risks for investors.

“Our ability to acquire and integrate larger or more significant companies, products, or technologies in a successful manner is unproven,” the filing said.