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Facebook’s “Defensive” Instagram Deal Could Spur Flurry of Tech M&A: Josh Brown

Daily Ticker

Is Silicon Valley a real-life 'Game of Thrones'?

News that Facebook will acquire photo-sharing mobile app developer Instagram for $1 billion in cash and stock stunned Wall Street Monday and some questioned the huge valuation for the 15-month-old start-up. The move by Facebook, which is preparing for its IPO next month, could be seen as the company's first attack against its tech rivals, says Josh Brown, author of The Reformed Broker blog and a vice president at Fusion Analytics.

"It's almost like Game of Thrones-esque move," he says in an interview with The Daily Ticker. "In the Game of Thrones you win or you die. This looks almost more like it's defensive."

Silicon Valley has become a dog-eat-dog world and the big tech giants — Apple, Google and Facebook — are doing everything they can to get a competitive advantage. Brown says he can almost imagine Facebook saying, "'We can't afford to allow [Instagram] to get into Google's hands. Or Apple's hands. Or Twitter's hands. How do we keep this from the other guys?'"

The two founders of Instagram, both Stanford alumni under the age of 30, were first approached by Facebook's Mark Zuckerberg to sell early last year, according to The New York Times. Since that initial offer, Instagram has expanded from seven million users to 30 million. Just last week Instagram received funding from a handful of investors, who gave it a $500 million valuation. Facebook paid double that just days later.

How this $1 billion deal will affect Facebook's IPO remains to be seen. Facebook, which boasts a user base of more than 800 million, could be worth as much as $100 billion after its offering.

Silicon Valley has seen an explosion of hot start-ups over the past few years and a the first wave have gone public in the past 12 months, notably LinkedIn (LNKD), Zynga (ZNGA), Pandora (P), Groupon (GRPN).

Investors continue to show a strong appetite for social media and mobile tech companies, begging the question: Is another tech bubble forming?

Facebook's acquisition may have partly stemmed from a need to be one step ahead of its competitors, but Brown says it has a much larger significance for the tech industry.

"Can you imagine what are the implications for Twitter?" he wonders. "A lot of money is raining down on a very select few people," who are likely to put it to work in the coming weeks and months on more deals and nascent start-ups.

Cool to Lame in 60 Seconds

Brown says the only negative aspect to this Facebook/Instagram deal involves the users — himself included. "People love the service," he notes. "It felt a little bit cooler, a little bit hipper, a little bit more 'now.'" But he, like many Instagram fanatics, worry that the app could be overrun with advertisements and the personal information they share with friends will become just another part of Facebook's data collection.

Facebook CEO Mark Zuckerberg tried to quell these concerns, saying Instagram would act as a standalone division of Facebook. Zuckerberg also noted that while this deal is a "milestone" for the social media giant, "We don't plan on doing many more of these, if any at all."

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