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But venture capitalist Jason Mendelson of Foundry Group says Facebook has other holes it may need to fill through sizable acquisitions. Video Follow Reuters Facebook Twitter RSS YouTube Read Obama healthcare could worsen U.S. debt: Republican study 9:41am EDT China suspends Bo from elite ranks, wife suspected of murder 11:49am EDT Dental x-rays linked to common brain tumor 7:48am EDT N.Korea says ready to launch rocket, prompts warnings 10:40am EDT Sony sees record $6.4 billion loss on tax hit | 9:51am EDT Discussed 308 Tyler Perry Pulled Over, Accuses White Cops of Racial Profiling via Facebook 291 Analysis: Justice Kagan–Giving liberals a rhetorical lift 286 Trayvon Martin call was ”mistake, not deliberate”: NBC Watched Transgender beauty says she wants to compete for Miss Universe Tue, Apr 3 2012 Journalists tour Pyongyang Mon, Apr 9 2012 Social media as South Korean political tool Mon, Apr 9 2012 Facebook to buy Instagram for $1 billion Tweet Share this Email Print Related News Facebook to buy Instagram for $1 billion Mon, Apr 9 2012 Facebook picks Nasdaq for marquee listing: source Thu, Apr 5 2012 Google CEO touts gains, focuses on long term bets Thu, Apr 5 2012 E-brokerages tap social media for faster service Thu, Apr 5 2012 Google defends privacy policy to European watchdog Thu, Apr 5 2012 Analysis & Opinion Instagrammatical man Facebook’s defensive Instagram M&A raises red flag Related Topics Tech » Media » Facebook » Related Video Facebook finds $1 billion friend Mon, Apr 9 2012 Instagram may not be Facebook’s last big purchase - Tech Tonic 1 of 2. A photo illustration shows the applications Facebook and Instagram on the screen of an iPhone in Zagreb April 9, 2012. Facebook announced on Monday that it will pay $1 billion in cash and stock for photo-sharing application Instagram, making its largest-ever acquisition months before the No. 1 social media website is expected to go public. The popular Instagram application, which allows users to add filters and effects to pictures taken on their smartphones, has gained about 30 million users since it first launched in January 2011. Credit: Reuters/Antonio Bronic By Alexei Oreskovic and Gerry Shih SAN FRANCISCO | Tue Apr 10, 2012 9:13am EDT 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 when measured by the lofty standards of Silicon Valley, where startup valuations have soared in recent years. It highlights the rising stakes in the social networking market in which services such as Facebook need to constantly excite consumers with new features and mobile applications. By acquiring Instagram - in a deal announced days after the startup closed a funding round that valued it at $500 million - Facebook may also have sought to absorb a potential rival or at least prevent it from falling into the hands of a major competitor like Twitter or Google Inc. "Anytime you see a social platform that's growing that quickly, that's got to be cause to be nervous," said Paul Buchheit, a partner at the start-up incubator program Y Combinator and a co-founder of FriendFeed, which Facebook acquired in 2009. "It would be better to have bought Twitter at this stage," he said of Facebook. "So if you're thinking this could be the next Twitter, it could be a smart thing to do." 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 says that as of the end of 2011, its users had uploaded some 400 million photos or about 60 pix per second, suggesting the sort of activity that Facebook seeks as it tries to wring revenue from mobile devices. Instagram launched its Android app just last week, garnering more than one million downloads already. 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." Instagram, with roughly a dozen employees based in San Francisco, closed a $50 million funding round last week from investors including Sequoia Capital and Greylock Partners, according to a source familiar with the matter. 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 Chief Executive 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 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. Tech industry insiders were quick to draw parallels with Google'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. "Facebook is acquiring a similar company in that it's fast growing, doesn't have revenue or a business model, but has become part of the online culture," said Gartner analyst Ray Valdes. "I would wager that almost everyone is also a Facebook user, so it's not like they're expanding their market," Valdes said of Facebook. "What they're buying is traction, they're buying engagement, they're buying brand value." Facebook, the world's No. 1 social network with more than 845 million users, is facing increasing competition. Last year, search giant Google launched Google+, a rival service that offers many of the features available on Facebook. 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. EXPENSIVE HABIT Instagram is backed by a number of Web industry bigwigs with ties to Facebook, including Benchmark Capital and Andreessen Horowitz. Benchmark partner Matt Cohler led a $7 million funding round in Instagram in 2011 and serves on Instagram's board. Cohler was also an early employee of Facebook, who still serves as a "special advisor" to Facebook, according to his profile on LinkedIn. Facebook generated $3.7 billion in revenue in 2011, and ended the year with $3.9 billion in cash and marketable securities on its balance sheet, according to its prospectus. While it was not immediately clear what portion of the Instagram acquisition price Facebook paid in cash, the price represents an "extraordinary" valuation, said Paul Deninger, senior managing director of investment banking firm Evercore Partners. "There are no obvious traditional valuation metrics that justify this price," he said, though he noted that that did not mean that it would be a bad deal for Facebook. Some tech industry observers noted that deal may dramatically ramp up the valuations on other fast-growing social media companies and app-makers - such as Pinterest - as entrenched Web players seek to snap up attractive assets and bolster their social capabilities to challenge Facebook. "It will be interesting because if Facebook has to keep buying up the hot new social network, that could get expensive after a while," said Y Combinator's Buchheit. (Reporting by Alexei Oreskovic and Gerry Shih; Editing by Edwin Chan, Lisa Von Ahn and Richard Chang) Tech Media Facebook Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (2) scottie4 wrote: Edition: U.S. Africa Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom Back to top Reuters.com Business Markets World Politics Technology Opinion Money Pictures Videos Site Index Legal Bankruptcy Law California Legal New York Legal Securities Law Support & Contact Support Corrections Connect with Reuters Twitter Facebook LinkedIn RSS Podcast Newsletters Mobile About Privacy Policy Terms of Use AdChoices Copyright Our Flagship financial information platform incorporating Reuters Insider An ultra-low latency infrastructure for electronic trading and data distribution A connected approach to governance, risk and compliance Our next generation legal research platform Our global tax workstation Thomsonreuters.com About Thomson Reuters Investor Relations Careers Contact Us Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests. NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here.

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