April 9, 2012, 12:59 PM

Facebook to buy Instagram

The $1 billion deal will be the largest acquisition to date for Facebook.

Lead Photo

Facebook Inc. today announced it has agreed to make its biggest acquisition, buying photo-sharing mobile app Instagram for roughly $1 billion in cash and Facebook shares.  The transaction is expected to close later this quarter.

Instagram is a social network of sorts that enables consumers to share and view photos with their friends. Consumers can also comment and Like their connections’ photos.

Facebook plans to keep Instagram independent of Facebook.

“We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience,” writes Mark Zuckerberg, founder and CEO of Facebook, in a post on his Facebook Timeline.  “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.”

The move is likely aimed at making Facebook more appealing on smartphones, says Rebecca Lieb, digital advertising analyst at research advisory firm Altimeter Group. Facebook noted in its S1 filing that its lack of advertising on mobile devices is a potential soft spot that could limit potential growth. While it has since rolled out mobile ads, the social network has plenty of room to grow in the space. "Facebook wants to encourage users to update more frequently from mobile," she says. "It's much easier to upload a picture than to type a post."

The deal was both an offensive and defensive move, says Lou Kerner, who runs the Social Internet Fund, an asset management firm that seeks to buy stakes in companies focused on social marketing and mobile commerce. "It's an offensive move to the degree that it gives Facebook a bigger beachhead into mobile," Kerner says. "And it is defensive in that it keeps a hot mobile property out of the hands of Google and Twitter." 

Instagram's financing round last week valued the company at $500 million. Yet, Facebook's $1 billion purchase price makes sense because of Instagram's widespread brand recognition, says Kerner.

Lieb agrees that Instagram holds a unique positioning. "There are a huge number of social photo app sites out there but none of them have the distribution and brand appeal of Instagram. If you build it, they will come is not necessary applicable to mobile apps." 

Facebook says that its engineering team and infrastructure groups will work with Instagram’s teams to foster the app’s growth.

Instagram may be the start of a wave of Facebook moves because the social network is likely to have a larger treasury for making acquisitions if it moves forward this spring with its initial public offering of stock.

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