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Facebook will pay $1 billion US 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.
Even in Silicon Valley, the acquisition stood out for its steep price for an apps-maker that still lacks any significant revenue sources.
The acquisition marks a change for Facebook, which has traditionally bought small companies as a means of hiring coveted teams of engineers. Facebook typically shutters the acquired company's product or builds similar versions that it integrates directly into the Facebook service. But Instagram will not only remain running, Facebook will build features into it as time goes by, both companies said.
The popular Instagram application, which allows users to add filters and effects to pictures taken on their iPhone and Android devices, has gained about 30 million users since it launched in January 2011.
Instagram, with roughly a dozen employees based in San Francisco, reportedly closed a $50 million funding round last week from investors including Sequoia Capital that valued the company at $500 million, according to the technology blog AllThingsD.com. The company was founded only in early 2010.
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 a source inside the company.
TAKING PAGE FROM GOOGLE'S BOOK
The Instragram deal is expected to resemble Google Inc.'s (GOOG-Q) $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. "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.
At the same time, the deal allowed Facebook to absorb a potential emerging rival. As Instagram has shot up in popularity in recent months, the company's leadership has mulled possible strategies to expand the service into a fully featured social network -- a photo-driven, stripped-down version of Facebook, Twitter, or even Path.
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.