Facebook’s acquisition of Instagram for $1 billion comes just months before the social network is expected to go public.
Facebook will pay $1 billion in cash and stock for the two-year-old photo-sharing application, which allows users to add filters and effects to pictures taken on their iPhone and Android devices and to share those photos with their friends. It has gained about 30 million users since it launched in January 2011.
Facebook, which is expected to raise $5 billion via the largest Silicon Valley initial public offering by May, will acquire Instagram's entire team.
"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," Facebook Chief Executive Mark Zuckerberg said in a blog post. "We don't plan on doing many more of these, if any at all."
The deal, a closely kept secret at the tiny start-up, is expected to close this quarter.
The acquisition marks an exception in strategy for Facebook, which has traditionally bought small companies as a means of hiring coveted teams of engineers. Facebook typically discontinues the acquired company's products or builds similar versions that it integrates into its service.
Instagram, however, will not only remain running, but Facebook will build features into it as time goes by, both companies said.
Tech industry insiders were quick to draw parallels with Google's $1.65 billion acquisition of YouTube in 2006. YouTube retains its own offices in San Bruno, California, and largely operates independently of Google.
"Facebook is acquiring a similar company in that it's fast growing, doesn't have revenue or a business model, but has become part of the online culture," said Gartner analyst Ray Valdes.
"I would wager that almost everyone [Instagram user] is also a Facebook user, so it's not like they're expanding their market," Valdes said of Facebook. "What they're buying is traction, they're buying engagement, they're buying brand value."
Facebook, the world's No. 1 social network with more than 845 million users, is facing increasing competition. Last year, Google launched Google+, a rival service that offers many of the features available on Facebook.
With its purchase, Facebook said it would continue to develop Instagram as an independent app that remains compatible with other social networking services.
"We plan on keeping features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook if you want, and the ability to have followers and follow people separately from your friends on Facebook," Zuckerberg wrote.
While it was not immediately clear what portion of the Instagram acquisition price Facebook paid in cash, the price represents an "extraordinary" valuation, said Paul Deninger, senior managing director of investment banking firm Evercore Partners.
"There are no obvious traditional valuation metrics that justify this price," he said, though he noted that that did not mean that it would be a bad deal for Facebook.