What effect does Instagram deal have on Facebook's IPO?

By
Matt Krantz, USA TODAY
May 2, 2012, 7:27 PM ET
2 min read

— -- Q: Will Facebook's purchase of Instagram affect the social-media company's initial public offering?

A: Facebook has started to show it's no longer a social-media site in Google's shadow, but a force to be reckoned with. And it's making this known amid its massive initial public offering.

Facebook surprised the tech world on April 10 when it agreed to buy mobile photo-sharing site Instagram for $1 billion. It's a whopping valuation that puts a price tag on Instagram above the $920 million value of the New York Times Co. (NYT).

There's no question some critics say Facebook overpaid for Instagram, best known for its mobile software app.

And there's no question, Facebook will need to update the balance sheet it submitted as part of its filing for the IPO. If nothing else, the company will need to subtract part of the purchase price from its cash holdings. Facebook reports cash and short-term investments of $3.9 billion, so the purchase of Instagram is clearly significant.

By buying Instagram, Facebook will have more shareholders at the table looking to cash in from the IPO. Part of the deal was done in cash, how much is undisclosed, so any value unlocked of Facebook after the IPO will need to be cut into more pieces and shared with Instagram investors.

But with that said, there are some potential benefits, too. Facebook's prospectus shows the company is still behind in the mobile Internet business. Adding Instagram will go a long way to get Facebook into the mobile Internet game.

Time will tell if Facebook is able to drive as much value out of its Instagram acquisition as it paid. And it will have plenty of time to do that as it nears becoming a public company.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz