First, I have nothing against Instagram or Facebook. I am an employee of neither, I am not privy to these conversations, this is a perspective I've developed as an observer. I wish the best of luck to both Facebook and Instagram in their business.

The question was very news worthy and generate quite a bit of buzz, patting on the back, but left me scratching my head (and apparently other people as well). How is Instagram worth more then NYT etc.

First a few oddities

- The ratio of cash and stock mix has not been released. (At least that I am unable to find)

- No other bidders for Instagram were indicated. (How could they come to that price in isolation? Especially after a recent VC round?)

- Facebook P/E has been claimed to be somewhere around 50 and above, depending on sources and when.

Here is my theory, as Facebook is currently aggressively using their capital to position the company for success, it is unlikely that there was a mass cash payout for Instagram. This leaves stock as the primary purchase power. Honestly I would be surprised if even 20% was cash, but for sake of argument assume that more then half of the purchase price was done using stock.

Now what is Facebook stock? It's a private company, about to enter an IPO, with a P/E ratio of possibly 50. It's not a liquid asset, until the company goes public (arguable considering what Goldman Sachs has been helping them with).

Based on the above, my assumption becomes that both Facebook and Instagram negotiated their agreement with an assumption about the future value of the stock. In that light, depending on their assumptions, Instagram really wasn't being valued at that. It's more a reflection on a the value of Facebook's stock vs it's evaluation prices. If I was in those negotiations I'd be arguing for more as well.

This of course has has the added benefit of generating a nice fluffy PR buzz for both Instagram and Facebook, a way to prime the pump before IPO.

Lastly, I know bubble has been tossed around a few times on this site (I've probably commented to that effect myself), but this has my wondering how much of the tech growth is legitimate vs hype.

I hope this perspective frames this in an insightful way, and makes you think about what value actually is for something that can not be openly bought or sold. Of course, welcome any feedback, corrections, and criticism.