Mendoza School of Business

10 Reasons Why Facebook Bought Instagram

Published: April 11, 2012 / Author: Kashmir Hill

When The Social Network 2 is written, I hope the screenwriter won’t pass up the chance to have Mark Zuckerberg explain to Sean Parker that “a billion dollars isn’t cool. Spending a billion dollars is.”

Facebook’s announcement Monday that it is acquiring Instagram, a precious mobile app for sharing retro-ized photos has everyone asking, ‘Why would Facebook pay $1 billion for a company with no revenue?”

1. Because it could. It’s fairly unusual for a company to drop a cool billion heading into its IPO, but Facebook already has a ton of cash on hand (just under $4 billion according to its S-1 filing) thanks to private share sales to Goldman Sachs, says University of Notre Dame biz prof Tim Loughran. “Facebook, with huge cash on hand, is already acting like a big, publicly-traded tech company,” says Loughran. “Facebook didn’t need to go public first to get the cash to make the major acquisition.”

2. Because it didn’t want a competitor to snap it up first. “It appears that Facebook really wanted to purchase Instagram before another bidder (maybe Google) made the deal,” says Loughran.

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Topics: Mendoza