Facebook's Instagram acquisition: the billion-dollar story

The New York Times is reporting that Twitter had a deal in place to buy Instagram for $525 million back in March — before the photo-sharing service's CEO Kevin Systrom called the whole thing off. We've heard about Twitter's interest in Instagram before, but the revelation is particularly noteworthy given the recent spat between the two companies, not to mention Systrom's claims to California regulators that Facebook's successful $1 billion bid was the only one received.

According to the Times, Systrom and co-founder Mike Krieger had verbally agreed to sell to Twitter before finally deciding to "remain independent" on March 20th. Three weeks later, the Facebook acquisition was announced, leaving the Times' sources shocked that Twitter wasn't given the opportunity to make a higher bid.

Since Facebook acquired Instagram earlier this year, people have wondered how the service might be changing. We're still not sure, but Facebook VP of Global Marketing Solutions Carolyn Everson has confirmed that monetization is coming in some form. Talking with Business Insider, Everson avoided the question of whether ads would start appearing on the photo sharing service, but she said that "eventually we'll figure out a way to monetize Instagram." Shortly after, she reiterated that the Instagram team was still relatively small and fairly new, but maintained that it would eventually start generating funds for Facebook. "There are many brands that use Instagram right now to try to get a feel for how to engage with their followers. We will definitely be figuring out a monetization strategy."

It's very likely this means ads, and Everson's comments aren't really surprising, especially since figuring out a way to get more money from mobile services has been a recurring issue for Facebook. But it does mean both that the company is already looking to bring Instagram into the world of revenue generation and that the timeline still seems highly uncertain.

After all the dust has settled, Facebook’s much-hyped "billion dollar" acquisition of photo sharing service Instagram is actually costing the company considerably less — $715 million, to be more precise. As reported by The Next Web, the value of the deal has fallen significantly thanks to Facebook's falling share price. The results were made public in the company's quarterly report; its second since its May IPO.

So far, Facebook has already shelled out $521 million — $300 million in cash and the remainder in Class B common stock, which has ten times the voting power of Class A shares but can’t be publicly traded. The company also issued approximately 11 million unvested Class B shares to Instagram stockholders, which are expected to be worth a total of $194 million as they vest over the next three years.

It's been a long time coming, but Facebook's purchase of Instagram is finally a done deal — both companies just announced the finalized partnership on their respective blogs. Additionally, Instagram revealed that users have now shared over five billion photos. This finalized purchase comes a few weeks after the FTC closed its investigation into the deal, and less than a week since the state of California finished a "fairness hearing" on the proposed deal.

Due to the fact that Facebook's stock has dropped since the deal was originally announced, the value of the purchase is below the $1 billion that was originally reported — we don't know the final purchase price yet, but last week it was estimated to be about $750 million. This caps a big year for Instagram, which finally released an Android app and saw its userbase double in just four months.

Despite the fact that the FCC approved Facebook's purchase of Instagram last week, the state of California had one more final hearing on the matter — a "fairness hearing" meant to approve the transfer of Facebook stock as part of the whole deal. The hearing took place today, and the Wall Street Journal reports that California's Department of Corporations found that the deal was "fair, just, and equitable," paving the way for the sale to finally be complete. Instagram CEO Kevin Systrom attended the hearing and answered questions regarding the fact that Instagram's purchase price had dropped from $1 billion to $750 million because of Facebook's underperforming stock. In response, Systrom said, "I've been taught throughout my life to realize there's upside and downside to all public markets."

He also noted that the $1 billion valuation of Facebook back when the deal was first announced "was something generated by the press," going on to say that "we were always talking percentage of Facebook outstanding stock plus a cash consideration." Unsurprisingly, it looks like Instagram took stock fluctuations into account back when the deal was being put together — and Systrom seems happy enough with the approximately $750 million he'll still be clearing when the sale is finally in the books.

Facebook's proposed purchase of Instagram has been cleared by the FTC, paving the way for the deal to close nearly five months after the initial announcement. This news comes a little over a week after the UK's Office of Fair Trading gave similar approval to the deal. The FTC passed the deal unanimously in a five-to-zero vote, saying that "the deal may now proceed as proposed." As Facebook has gone public since the purchase was first announced, the value of the deal is actually a good bit lower than the original estimated purchase price of $1 billion — the deal is for $300 million in cash, plus 22,999,412 shares of Facebook common stock. As of today, the whole deal is valued at $747.1 million.

There's no word on when exactly this all might be finalized, but we'd expect the FTC's approval will move things along pretty quickly. While there's a good chance the deal may be done soon, we might be waiting just a bit to see the first official release following the completion of Facebook's purchase — Instagram just rolled out a brand new version of the app last week.

The UK's Office of Fair Trading (OFT) has halted its probe into Facebook's $1 billion purchase of Instagram. OFT began to look into the purchase last month over fears that it would give Facebook an unfair advantage in the photo-sharing market. If it had found sufficient evidence it would have referred the case the UK's competition commission which could have potentially taken steps to block the takeover.

In an emailed statement, OFT says that it "has decided, on the information currently available to it, not to refer the following merger to the Competition Commission under the provisions of the Enterprise Act 2002." The probe mirrored that of the FTC, whose investigation is still ongoing.

The Facebook buyout of Instagram may not happen as soon as planned. According to the Financial Times, "two people familiar with the matter" say the US Federal Trade Commission has launched an investigation of the deal and is currently collecting information from Facebook's competitors. That doesn't necessarily mean it's going to find any problems, and it's not unusual for the FTC to investigate deals greater than $68.2 million under current antitrust laws; the deal is still expected to be approved.

An FTC probe, however, means that Facebook probably won't be able to start using Instagram as quickly as it would like. Facebook has previously said it expects the deal to close in the second quarter, but an investigation could take six or twelve months, during which Facebook won't be able to integrate any Instagram features into its service. That means one of the biggest new parts of its mobile service isn't going to be operational when it makes its initial public offering later this year. The only real silver lining for users is that anyone who's concerned over the Instagram acquisition will have a little more time before it officially joins Zuckerberg's empire.

Ahead of its IPO later this year, Facebook just released an updated Form S-1 with first quarter earnings that's now available for perusal in the SEC's filing system. Revenue is up considerably year over year — $1.06 billion versus $731 million a year ago — but net income is down a tad from $233 million to $205 million. The lower profit is attributed to just about everything in Facebook's financial sheet: operating and administrative costs, marketing, and R&D. Monthly active users of the service are now reported at a whopping 901 million, up from 680 million at the end of Q1 2011. That's year-over-year growth of over 32 percent. Of those 901 million, some 526 million are active on a daily basis.

Though Facebook's blockbuster purchase of Instagram isn't reflected in the Q1 numbers — the deal happened this month, and Q1 ended on March 31st — the S-1 reveals some interesting details of the acquisition. Notably, Zuckerberg's team paid some $300 million in cash plus "approximately" 23 million shares of Facebook. Considering the $1 billion sale price being thrown around, that would value those shares at a little over $30, and odds are pretty good we'll see that share price go well higher both before and after the IPO date.

How do billion-dollar deals get made in Silicon Valley? In the case of Facebook's acquisition of Instagram, the negotiation period was a mere weekend at Mark Zuckerberg's house, where he and Kevin Systrom, Instagram's cofounder and CEO, thrashed out a mutually agreeable valuation for the photo-sharing service. This is according to a Wall Street Journal report, which goes on to say that Zuckerberg informed Facebook's board of directors that he intended to spend $1 billion on Instagram on Sunday morning, April 8th, approximately 24 hours before the takeover became official. The board reportedly did vote on whether to approve the decision, but sources close to these proceedings describe them as "largely symbolic."

Facebook's COO, Sheryl Sandberg, is said to have been informed on Thursday of that week that Zuckerberg was going to aggressively pursue the purchase of Instagram, though she herself isn't reported to have participated in the meetings with Systrom. Amin Zoufonoun, Facebook's Director of Corporate Development — who, like Sandberg, joined the company after a previous stint at Google — was present during the negotiations, so at least some part of Zuckerberg's corporate team was there to assist him. Ultimately, however, the Facebook founder and CEO remains very much in control of the social juggernaut he started back in 2004. For more on the full timeline of Zuckerberg and Systrom's weekend talks, read the full WSJ report at the source link below.

Early last week, Facebook's Mark Zuckerberg announced that his company had acquired photo-sharing service Instagram for $1 billion. Later reports have suggested that the deal was sudden, taking a mere two days to complete. Now, a New York Times report has corroborated that with a history of Instagram, from its start as prototype "Burbn" to its acquisition. Founder Kevin Systrom had told associates that he was not interested in selling, says the Times, mere months before Zuckerberg's call, and Instagram had just completed a second round of funding, suggesting it was looking to remain independent.

The full profile of Systrom and Instagram describes a close-knit network of investors and engineers that would ultimately help propel Instagram to success. By selling to Facebook, however, Systrom may have lost an ally: Twitter founder Jack Dorsey, who had supported Instagram and allegedly expressed interest in buying it in the past few months. Since the acquisition, Dorsey has apparently stopped using the service, though his company declined to comment officially.

It's only been a few days since Facebook shelled out $1 billion in cash and stock to purchase Instagram, but now we've got some information on how the deal came together. According to The New York Times' anonymous "people with knowledge of the matter," CEO Mark Zuckerberg was at the forefront of the entire acquisition, unlike previous (and smaller) transactions. Apparently it all came together over a matter of two days — Zuckerberg called Instagram CEO Kevin Systrom last Friday and said he wanted to buy the photo sharing service, and by Sunday all of the details were worked out. Zuckerberg's phone call was just days removed from the release of Instagram for Android (which was downloaded over a million times in a day) and a $50 million funding round that brought the company's valuation to a total of $500 million. Ultimately, it took Facebook $1 billion to claim the photo sharing service — and its 13 employees — as its own.

Instagram's buyout has prompted the usual internet backlash that occurs whenever Facebook touches something, but do we really know what's happening or why? That's the question that Paul Ford and Matt Webb attempt to answer, in their separate but equally thought-provoking deconstructions of the acquisition and what it means for the web and for users. Ford says that Facebook is really just a big collection of products like chat, walls, feeds, and so forth, and that Instagram is just one more addition to the list — albeit one that Ford (arguably) calls "an artfully designed product that does one thing perfectly." But what is a "product" on the web? Ford argues that "on the web, 'product' has gone meta" — "an internet product is very often a thing that lets other people make things... and you can get 30 million people working for you, for free, if you do a good job of it." Webb takes the concept of meta product further, arguing that Instagram users are actually workers, since the service consists of user creations: people produce photos, comments, likes, and other valuables that are meaningful... in the Instagram universe.

The consequence of insular systems like Facebook and Instagram, Webb argues, is that a community and culture develops around the service, making them "closed economies" — Instagram's worker bees spend their time and effort in Instagram, as a factory worker would "have been housed in a factory home and spent their money in factory stores." So it doesn't seem surprising that some are speaking out against what Ford calls an obvious "sellout:" a deal that, when looking through Webb's lens, has given the workers a front row seat to Facebook and Instagram getting rich on their labor. Of course, none of the bellyaching over Facebook has stopped Instagram's flood of new hires — and given past revolts against the social giant, it doesn't seem likely that many people will opt to leave town this time around.

You'd think Instagram, with its massive popularity and perfect price tag, would've been top of the Apple charts at least once by now, but according to the company, it's only done it for the first time tonight. Reaching the pinnacle of the iOS free apps list, Instagram seems to have found new momentum in the wake of its billion-dollar acquisition by Facebook.

There was a quite unpleasant backlash among Instagram's iOS users when the Android version of the app was released — with some claiming they'll stop using the photo-altering and sharing service due to the "dilution" of quality that would result from letting in the great unwashed of Android — but as it turns out, those misguided souls were exactly the minority we thought them to be. The hype of the Facebook acquisition and the expanded community resulting from being on Android have apparently helped breathe new life into Instagram's growth.