When Facebook announced plans to acquire Instagram for approximately $1 billion in cash and stock, I noted the purchase is going to cost the company 27 percent of its revenue in 2011. Facebook saw revenue of 777 million in 2009, $1.974 billion in 2010, and $3.711 billion in 2011.
I thought to myself: the amount Facebook offered for Instagram is not only huge because the startup has no business model, but because Facebook is only making a few billion a year. Then it dawned on me: Facebook actually does have the money to buy Instagram many times over, and I'm not just talking about the billion or so it has already made so far in 2012.
If we go back to just last month, you may remember the social networking giant effectively doubled its credit facility to $5 billion and secured a $3 billion bridge loan . On top of all this, when Facebook goes public in the next few weeks, it will suddenly have even more bling, thanks to its $5 billion initial public offering (IPO).
Of course Facebook isn't going to go and spend all this cash just because it can. Although it would be quite interesting if Facebook went out and bought Pinterest, don't count on it. In fact, Facebook co-founder and CEO Mark Zuckerberg said as much in his Instagram announcement: "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. We don't plan on doing many more of these, if any at all."
In short, while Facebook paid quite a hefty amount for Instagram, the company did not exactly break the bank in doing so. More importantly, Facebook still has the money to block its competitors from buying another hot startup on the cheap, because it still enough money to significantly bid up the price.
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