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Instagram deal positions Facebook for initial public offering

Published April 9, 2012 4:30 pm

Acquisition • The social network giant buys photo appfor $1 billion.
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Facebook snapped up photo-sharing service Instagram for $1 billion in cash and stock Monday — its largest acquisition yet, as it nears an initial public offering.

A wildly popular iPhone app with 30 million registered users that recently became available on Android phones, Instagram is built around smartphone photos that let people apply filters to images they shoot so that some appear as if they've been taken in the 1970s or on Polaroid cameras.

Monday's deal ­— by far the biggest for an app — trumped Zynga's $200 million acquisition of OMGPop last month and scored a megapayday for Instagram's 27-year-old founder and CEO, Kevin Systrom.

Speculation on Systrom's cut ranged up to $400 million, with venture capital firms getting most of the rest. Barely 2 years old, Instagram's dozen or so employees could divvy up an estimated $100 million.

"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 announcing the news Monday. "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."

He said Facebook, whose stock is expected to start trading in May, will run Instagram as an independent company. Facebook, the world's largest social network, plans to raise $5 billion in the IPO, making it the biggest Internet offering on record.

Not much will change with the service, Zuckerberg said. Consumers will still be able to run it on rival social networks such as Twitter. That's a departure from Facebook's history of buying startups and either integrating the technology or shutting it down.

The acquisition of the San Francisco-based company, founded in March 2010, is expected to close by the end of June.

Rebecca Lieb, an analyst at the Altimeter Group, described the Instagram acquisition as central to one of Facebook's most urgent needs, how to make its service more appealing on smartphones.

"It's easier to update Facebook when you're on the go with a snapshot rather than with text," Lieb said. "I think it's definitely a mobile play."

Instagram's steep price tag raised eyebrows among many, including analysts who drew parallels with outlandish acquisition deals associated with the Internet bubble of the late 1990s.

"Facebook will never make that $1 billion back, but it's still smart," said Patrick Moorhead, principal analyst at Moor Insights and Strategy, who deemed the move "defensive."

"Instagram was the only thing challenging [Facebook's] dominance in photo sharing," Moorhead said.

Digital photos are also a sign of the times. While Instagram fetched $1 billion, EastmanKodak is mired in Chapter 11 bankruptcy. It employs more than 17,000.

Photos have been a key part of Facebook's growth. Photo-sharing is among the most popular activities among its 850 million members. On average, 250 million photos are uploaded per day.

Last month, Facebook announced improved photo capabilities, such as higher resolution and full-screen photos.