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Facebook agrees to buy Instagram; Will pay $1 billion for photo-sharing app

Facebook Inc., the biggest social networking service, is buying the Instagram mobile photo-sharing application for about $1 billion in cash and stock, using its biggest acquisition yet to attract users of mobile devices.

The transaction is expected to close later this quarter, Menlo Park, Calif.-based Facebook said Monday in a statement on its site. Facebook Chief Executive Officer Mark Zuckerberg also announced the deal on his Facebook profile page.

Instagram, owned by San Francisco-based Burbn Inc., boasts more than 30 million users and the most popular free photo-sharing application on Apple Inc.'s App Store. The deal may help Facebook win handset users and advertisers who target them, said Rebecca Lieb, an analyst at Altimeter Group LLC.

"In order to monetize mobile, Facebook needs a lot more mobile participation," said Lieb, who is based in New York. "What they bought with Instagram was a photo app with high brand recognition and an enormous audience."

The deal marks the first time Facebook has acquired a product and company with so many users, Zuckerberg said in his posting. Facebook, which intends to raise $5 billion in the biggest initial public offering of an Internet company, says it plans to let Instagram remain independent.

"We need to be mindful about keeping and building on Instagram's strengths and features rather than just trying to integrate everything into Facebook," Zuckerberg wrote.

"Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people," he wrote.

Instagram was introduced in October 2010 by Kevin Systrom and Mike Krieger. Building on its popularity among iPhone users, last week the company added an application for devices that use Google Inc.'s Android operating system.

Instagram received seed funding of about $500,000 from Andreessen Horowitz and Baseline Ventures in 2010, according to the TechCrunch website. It raised a $7 million round in 2011, when it had 1.75 million users, from Benchmark Capital and a group of angel investors including Twitter Inc.'s Jack Dorsey and Quora Inc.'s Adam D'Angelo.

Many of Instagram's backers have close ties to Facebook, including Marc Andreessen, who sits on the board of the social network, and Benchmark general partner Matt Cohler, who was one of Facebook's earliest employees and worked as a senior vice president of product management there until 2008. He remains a special adviser to Facebook CEO Zuckerberg.

Systrom himself once received a job offer from Zuckerberg in the early days of Facebook and turned it down.

"I decided I wanted to stay in school," Systrom told Fast Company magazine last year. "That's one of those decisions that I look back at I would've loved to have been part of Facebook's growth over the years."

Marketers including Nike Inc., Tiffany & Co. and Burberry Group Plc have begun using Instagram to promote products using photos, Lieb said. Gap Inc.'s Banana Republic unit held a contest on the site asking users to submit pictures of their New Year's Eve outfits for a chance to win a trip to New York City.

"Providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together," Zuckerberg said.