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M&A flashback: Instagram joins Facebook in $1B deal

When Facebook acquired Instagram six years ago, the social media giant had only just gotten a handle on mobile after struggling to translate its sprawling empire of “likes” from the desktop. This landmark deal changed everything.

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When Facebook acquired Instagram just over six years ago, the social media giant had only just gotten a handle on mobile after struggling to translate its sprawling empire of “likes” from what was once an exclusively desktop experience. Far from representing Facebook simply buying what it didn’t want to build, though, the purchase of Instagram has forever changed how social media users connect with each other and revolutionized how advertisers tap into those networks.

Facebook wrapped up its $1 billion acquisition of Instagram on September 6, 2012. But the price tag only tells part of the story behind the deal. Instagram became Facebook’s 40th M&A transaction in its relatively short history—and it still ranks as its third-largest purchase since the start of 2007, per the PitchBook Platform. The deal effectively signaled the halfway point in Facebook’s robust M&A history to date, with the company completing an additional 43 M&A deals since buying Instagram, including the staggering $22 billion acquisition of messaging platform WhatsApp in 2014.

But turning Facebook into a prolific acquirer of emerging tech wasn’t necessarily founder and CEO Mark Zuckerberg’s plan. In his announcement of the Instagram deal that April—posted, of course, to his own timeline—Zuckerberg said that Facebook didn’t “plan on doing many more of these, if any at all.” Meanwhile, Facebook almost appeared to dismiss Instagram as merely “a fun, popular photo-sharing app for mobile devices” when it officially announced that the two had struck an agreement.

In the end, the purchase of Instagram has proven to be a far more visionary transaction than anyone likely anticipated at the time. The product that Facebook purchased is much more than just another trendy app—it’s become essential to the social lives of millions and an increasingly slick conduit for advertisers. Zuckerberg & Co. certainly have gone on to do more M&A, in part to fend off further competition while wielding Instagram like a cudgel over the better part of the past two years to beat back upstarts like Snapchat.

What’s more, when Facebook struck the deal, it had yet to go public, meaning the value of the stock component of the cash-and-stock transaction was effectively up in the air until after May 18 of that year. And, lest anyone forget, the IPO didn’t exactly go off without a hitch.

Facebook offered $300 million in cash for Instagram along with nearly 23 million shares, making the transaction worth $1 billion up front. But the social media giant’s stock dropped roughly 43% in the months following its debut on the public markets, meaning that by the time the deal closed, it looked like Instagram’s founders Kevin Systrom and Mike Krieger had left $285 million on the table.

The acquisition of Instagram has also, in hindsight, come to represent a watershed moment in VC history, helping to underpin several of the basic ideas behind what constitutes a “unicorn,” a concept that would need to wait another year after the deal closed for Aileen Lee at Cowboy Ventures to popularize the term. And the $1 billion deal size represented a doubling in valuation for Instagram, as well as a lucrative exit for its list of investors:

By several incredible metrics, Facebook’s acquisition of Instagram has also proven a transcendent success for virtually any company to make, much less one backed by major VC firms and about to IPO. Among the many recently identified by Venture Beat’s Emil Protalinski, a few stand out from the rest:

  • Instagram now has more than 1 billion monthly active users
  • That figure has grown 60% in just three years
  • That growth has effectively dropped the purchase price on a per user basis to just $1

Instagram now generates almost one out of every four dollars of Facebook’s roughly $20 billion in annual ad revenue, bringing in over $1 billion on a quarterly basis. Not bad considering that for the quarter it struck the deal, Facebook reported just $1.2 billion on the top line.

But things almost didn’t turn out this way for Facebook or Instagram. Just three weeks before it was announced that Instagram had accepted Zuckerberg’s $1 billion offer, the company—not coincidentally, it’s been said—shot down a $525 million bid from Twitter. Instagram was at that time integrated into Twitter much as it is today with Facebook and, with only 13 employees, that initial offer must have been tempting for a startup that had reached a subscriber base of some 30 million monthly active users about 18 months after its launch in 2010.

In the years since, some have argued, most notably Ben Thompson, founder of Stratechery, that Facebook gained unfair scale with the deal. One’s left wondering, though, if that would have been the case had Instagram gone to Twitter instead, and whether Instagram would’ve achieved the reach its current scale.

For Nick Adler, an investor and talent manager at Cashmere Agency, as part of Facebook, Instagram has become something like a magazine—a glossy representation of the highly curated self. And it’s that dynamic which has made Instagram not only Facebook’s most successful acquisition to date, but also why so much of the company’s lucrative mobile ad business is bound up with its future as the leading force behind the budding business of influencer marketing.

Instagram is also the asset that has perhaps the least taint from Facebook’s recent troubles attached to it. And that alone could prove priceless going forward, with Zuckerberg’s longtime lieutenant Sheryl Sandberg, alongside Twitter CEO Jack Dorsey, testifying last week before Congress about the circulation of misinformation on their platforms.

And if that scrutiny, which could result in greater government regulation of the social media giants, isn’t enough, a recent Pew survey found that 26% of US users of Facebook have deleted the app from their phones in the past year, eating into the hard-won gains made in mobile down the years and potentially the ad dollars that have followed—gains that Facebook might nevertheless preserve thanks to its purchase of Instagram.

  • adam-headshot-15-kbh-637x518.jpg
    Written by Adam Putz

    Adam writes about M&A at PitchBook. Originally from Minnesota, Adam studied philosophy and journalism before earning a PhD in English from the University of Warwick. He is the author of The Celtic Revival in Shakespeare’s Wake (Palgrave Macmillan, 2013). When he’s not covering the latest deal or financial news out of Europe, Adam likes to write about environmental issues. In his free time, Adam enjoys hiking and canoeing, reading and traveling.

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