Facebook acquires Instagram in $1 billion deal

SAN FRANCISCO -- Facebook snapped up photo-sharing service Instagram for $1 billion in cash and stock — its largest acquisition yet, as it nears an IPO.

A wildly popular iPhone app that recently became available on Android phones, Instagram lets people apply filters to photos 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. 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 early Monday.

He said Facebook, whose stock is expected to start trading in May, will run Instagram as an independent company.

Not much will change with the service, he 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 start-ups 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.

Instagram's steep price tag — roughly the same as Peet's Coffee & Tea or Jack in the Box— 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," says Patrick Moorhead, principal analyst at Moor Insights & Strategy, who deemed the move "defensive."

"Instagram was the only thing challenging (Facebook's) dominance in photo sharing," Moorhead says.

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.