While different than any of FB's previous acquisitions (the service will remain), I think this deal has echoes of the FriendFeed deal. With the FF deal, FB acquired current CTO Bret Taylor who has been, by most accounts, hugely important in helping evolve the product.

As tweeted, innovation of your core use case is amazingly hard at scale. FB cannot ever lose photo sharing. So they are making a bet that the Instagram team can positively disrupt that from the inside.

I think it's a brilliant, ballsy move on Facebook's part. And an offer that Instagram simply could not refuse.

A lot of big company (let's put FB there) acquisitions reek of either desperation or are mainly defensive. As a result, few work. This is almost the opposite. It's FB recognizing the long-term potential of Instagram and its team, and getting out way in front of it.

Say what you want about Facebook, their acquisition strategy has been fucking brilliant. This continues the trend.

Do you think that this is a departure from or a continuation of their M&A strategy?

I think it's a bit of a departure in that Instagram will remain live and separate. But I think that's the right play here. FB trying to subsume IG would harm and/or kill it. Now it can still flourish on its own. There will be tie-ins, obviously. I see it as not unlike Google/YouTube in that regard.

Remember too that Facebook had been working on their own mobile photos app. Given how long it has taken, I can only assume there were issues. This fixes those right away!

@MG - to what extent though do you think Facebook should have recognized their lack of progress in photos and dedicated more time to it? For me, it's been very surprising they didn't fast-follow Instagram filters and some sort of albums (Batch, etc). Was this a byproduct of their lean approach to feature dev? And if they don't fold Instagram into mobile, do we have any confidence the mobile app itself will improve? They already had to create a separate messenger app. What's up with that?

@Hunter - While I'm obviously not privy to the decision process there, I did leak some pics a while back of the app you're suggesting :) It was a very real project and was still being worked on last I heard (a few weeks ago). No clue what was taking so long, but they clearly wanted to nail it. And let's be honest, IG already had.

The bigger app is too bloated. I hope they do continue the trend of smaller, dedicated, nimble ones. Love Messenger.

@MG toolbelt as opposed to swiss army knife would be an interesting approach for them to take re: mobile apps, just need to nail fluid switching btw them but perhaps that's where the HTML5 comes in?

@Hunter - I would actually bet that's where a deal with Apple comes in :)

blah to special deals. One of the unappealing aspects of FB for me is how Zynga, Spotify, Washington Post, etc all get preferential treatment w/in the walled garden. I understand testing things w trusted partners, but the uneven playing field bothers me as a user (and i think ultimately is a potential weakness of their platform).

That special treatment thing also bugs me. There've been some stories about users of Instagram reacting negatively to the acquisition. Do you think this deal is actually harmful to users or is that just senseless backlash?

@Hunter - yeah, but they have little choice in this case right now. That's what the "Facebook Phone" is all about. Leverage. Ownership.

@Jason - Senseless backlash that everyone will forget about in 3 days. Not harmful at all. Welcome to the Internet, where people bitch and moan and then carry on.

@goldman - i don't believe acquisitions are fundamentally good or bad things. It's the context.

If you think Instagram is a utility: cool photo app which makes your pics better and publishes your photos to FB, Twitter, etc then this acq is neutral/good.

[1/2]

If you think Instagram is a community, then you are concerned about how the community norms change as more people enter, abt FB's promises to keep separate, abt the Instagram team now optimizing for FB use cases as opposed to everything else, whether the team can be hungry post $1B, whether they can still recruit talent, etc. So more "concerns" but I don't buy a "jump the shark" inevitability.

However it's a change none-the-less and people's reactions are a good sign. It means they care

[2/2]

One thing that's been written about but not entirely explained is the Series B financing that closed days before the acquisition. This seems only beneficial to the investors in that round. My guess is that there was a noshop that precluded them from talking acquisition until the round was closed? Or it just felt like the right thing to do - honor the financing commitments already made?

@goldman The fundraising issue is also quite interesting to me. It would be strange to have a no shop in financing docs (but this was a strange financing). I haven't looked at the allocation of the investors in their previous round versus this round, but I assume that the previous investors aren't thrilled with the timing. The fundraising is going to cost the initial investors money and there's no logical reason for it.

@goldman On the FB, M & A strategy, I definitely think this is a change. This is a product and people. None of their other acquisitions have had such a large user base and such prominence. It's going to be really fascinating to see how they deal with the integration issues (how the product is used, the interactions with other fb products, other photo editors, etc).

I think this whole thing feels a bit fast and not entirely thought out but hard for FB to lose because they took out an "attention" competitor. @mg side note: ff is still living but obviously much smaller. IG is potentially a big brand that replicates core behavior on FB so it is going to be pretty tricky. Could be Google/YT or Yahoo/Flickr! @goldman how long until FB has to write a bigger check for Twitter?

The rumored story around the funding feels right: Instagram weighing M&A vs funding, gets a lot of enthusiasm and does a round, FB (which had been talking w them, expressing interest) gets alarmed and comes in w "you can't say no" offer, founders decide to take it. Sure investors might have liked to go for it, but once the founders at a company this stage say "we want to sell," investors really need to support. And at $1B, the previous dilution wasn't an issue.

To answer Narendra's question with a question: What's the feeling on what this does to valuations across the board?

Hunter tweeted about Path's prospects earlier (twitter.com).

If Jeremiah is correct and this signals a change in FB M&A philosophy, are we likely to see other big purchases from them?

Are other folks likely to reconsider their own M&A strategies to be less acqui-hire centered and more big bet-ish? What impact does this have on M&A through out the industry?

As you ponder the valuation question, I also recommend to you Paul Ford (@ftrain)'s article:

nymag.com

On the valuation question, I think of it in two buckets. #1 The companies with large established user bases have to compare themselves to Instragram and, based on this deal, their valuations should be significantly up. #2 The other bucket are the acqui-hire/talent deals. I don't think this should have any effect on them. The buyer still would have to take the product and build the user base, so it's not clear they should pay more for those companies

M&A is musical chairs. When the music stops, you're left to dance alone. See: all video startups after the YouTube, Vimeo, Crackle acquisition frenzy.

People often make the mistake of using comps across an industry. Maybe Instagram was worth $30/user to FB but that doesn't mean it was worth $30/user to every acquirer, nor that photo apps in general are worth $30/user.

A glass of water is worth $1B if Zuckerberg is stuck in the desert and you have one. That doesn't mean somebody else's glass of water is also worth $1B.

But between this and the JOBS act, and a slew of mediocre low-priced aquihires over the past couple years, people (and potential acquirers) will perceive this event as the beginning of a late 90's-era boom.

Which typically doesn't end well -- unless you have a company you want to sell.

Great article @goldman. To valuation, Facebook is that poker player who just discovered having a big stack of chips means he can push people around. I think this ensures 10 or so atypically large exits and keeps VCs excited. If the market goes south, it will dry up in a hurry. And anything that is mobile/beautiful/growing is going to get a premium. Om's article was solid too - gigaom.com

To Narendra's point, let's also keep in mind the structural conditions which support large M&A, namely liquid equity. If IPO window closes the companies which got out the door (Yelp, Groupon, Pandora, etc) could potentially find it easier to do deals bec (a) they have liquid stock to use and (b) they have new cash proceeds from the IPO.

Brenden asks: "is there any benefit for fb to do this with a pending IPO? if shareholders agree with it, wont it be a wash?"

A: the only thing i could think of is when acquirer is able to pay a lower "price" using pre-public stock bec all parties assume it will trade up at IPO, & whether this approach has any tax benefits (ie hold the appreciated stock for LT cap gains?) but doesn't seem to be applicable in this case.

To follow up on my question to Hunter, I'll first say I know very little about public markets and IPOs. I spend most of my time building stuff. I'm not an investor.

That said, I started wondering about the timing of this acquisition from Facebook's side. If they spent $1B on Instagram pre-IPO, and the shareholders thought that legitimately increased the value of FB, could FB then raise more money in their IPO and be worth $1B more, making the acquisition actually not effect their market cap?

@brenden

i think you usually see that more when revenue or earnings will be directly accretive as they shift from a lower multiple company to one which commands a higher multiple.

In this case, if you believe there an "Instagram pop" in valuation, there's no reason to think it wouldn't occur had FB been public already. And since no one saw Instagram as a current day threat, i don't believe its existence was dampening the FB IPO at all.

@Hunter: Makes sense.

@All:

I'm really looking forward to watching how Instagram exists within FB over the next few years. I remember when Google acquired YouTube, it was clear why the YouTube asset would immediately create more value, search data, and (most importantly) provide an addition source of compelling traffic (revenue) to Google.

How are you guys thinking Instagram will add to FB's bottom line?

(1/2) On the FB timing point, I think it really depends on the valuation question (which I don't think has been publicly addressed). How much FB stock will Instagram receive, at what valuation and at what time? My suspicion is that the deal is a fixed exchange ratio which means that Instagram receives a fixed amount of FB stock. From FB's perspective, they have assurances on the amount of dilution created by the deal without having assurance on the ultimate value that will be delivered.

(2/2) From Instagram's perspective, they are going to have the ability to participate in the upside of the IPO and, given the likely FB stock movement, they're not bearing much downside risk. There will be a timing issue because they won't get liquid stock until the IPO closes and the deal clears regulators.