How Instagram Could Have Cut a Better Deal

http://dealbook.nytimes.com/2012/08/20/how-instagram-could-have-cut-a-better-deal/

by markszcz • 14 years ago

38 48 14 years ago

dealbook.nytimes.com

atirip• 14 years ago

TL;DR 300m + 700m in Facebook shares in April (much less today) was careless and very very very very veryvery shitty deal, for a service with no revenue, albeit hot. So learn from this.

debacle2• 14 years ago

Instagram will go down as being a shitty deal for both sides. An arranged marriage, as it were.

memnips2• 14 years ago

Why do you think this will end up being a shitty deal for Instagram?

archangel_one• 14 years ago

Even if FB goes bust tomorrow, $300M seems like a pretty damn good deal for Instagram on its own.

sp3324• 14 years ago

Arranged marriages are equally happy as marriages "for love". http://libres.uncg.edu/ir/uncg/f/J_Myers_Marriage_2005.pdf

duaneb5• 14 years ago

It would have been a great deal had Facebook's stock shot up (which it could have, I think). So the split between cash and stock is a good way to hedge bets, NOT necessarily a "very very very very veryvery shitty deal".

jonknee• 14 years ago

This was a well known fact from the get go. TechCrunch on May 17th:

http://techcrunch.com/2012/05/17/facebooks-38-share-price-ma...

> When Facebook agreed to buy Instagram, it said it would pay with $300 million in cash and 22,999,412 shares of stock. That stock is now worth nearly $874 million, creating a $1.17 billion price tag.

reitzensteinm• 14 years ago

To save everyone the math, 23 million shares is now worth ~$458.8 million.

memnips2• 14 years ago

Instagram "no longer" a $1 billion sale would perhaps be more accurate. Still quite impressive for a zero-revenue service.

melvinmt• 14 years ago

I've done this math in my head too much now in the last couple of weeks. Not sure why I care that much.

tommoor• 14 years ago

This article was definitely interesting reading for someone that knows nothing about acquisitions, not so much for the particular fate of Instagram but for the details of how stock/cash deals can work and the stock collar possibilities...

slantyyz• 14 years ago

During the first bubble, one of the companies I worked for used just about all of their IPO money to buy another company.

The buzz was that the owner of the company being bought refused to take any stock and only took cash (smart move), and within a month or two of the purchase, most of the acquired people had already left. The company I had worked for ended up selling the remaining assets for something like 1/40th of what they paid a year later.

Considering my company's stock price tanked on day one of the IPO and continued to go down, the only winner in that deal was the guy who took cash for his company.

paulsutter• 14 years ago

The 30/70 split is a nice structure that takes into account the uncertainty of the values involved. Seems like a good deal for Instagram and a sane way for Facebook to do it. Imagine if the stock had shot up to 70, or if it falls to 10. Seems like a great structure to me.

It's hard to imagine that the two sides weren't fully aware of the uncertainties involved during the discussion. These are smart folks. This article seems like it's just an opportunity for the author to show off his knowledge of alternative structures.

catilac• 14 years ago

I agree. However, I definitely did not know about those alternative structures.

refurb• 14 years ago

These types of structures are actually very common in the biotech industry where uncertainty is everywhere.

The deals are typically upfront payments of several hundred million dollars in combination with milestone payments that often comprise of 50-90% of the total deal's value.

It's a smart move on Facebook's part since it shifts a great deal of risk to the Instagram owners. Facebook does well? Instagram does well. Facebook flounders? So does Instagram.

joejohnson• 14 years ago

So at today's FB price, this would put the acquisition price at just over $700 Million.

andrewhillman• 14 years ago

Nothing like a writer playing "Monday morning quarterback." I like the closing sentence...

"It is a lesson for those who strike deals in the heat of the moment — and perhaps too hastily."

rohit01• 14 years ago

It may eventually be a better deal on the long term if FB shares go UP in the long run :P

codegeek• 14 years ago

"$300 million in cash "

Enough said.

dmishe• 14 years ago

This.

rokhayakebe2• 14 years ago

What does "this" mean? I've people use it as a comment, and I also noticed others disliking it.

AznHisoka2• 14 years ago

$300 million for a service that would've been lucky to make $100,000 annually in revenue.

1) Photo sharing => not profitable niche 2) Mobile app => hard to monetize

nchuhoai• 14 years ago

Saying the deal was bad for instagram and attributing it to careless decisions by young founders is like saying you should have known how the FB stock is going to develop.

Duh, you always take risk if part of your deal is in stocks, you dont have to be a professional to know that. Heck, people, including seasoned investors have predicted on average 54 for the stock, so why wouldnt you have taken stock?

Always awesome to see people play Captain Hindsight: http://www.youtube.com/watch?v=cqkI691dxNg

larrys• 14 years ago

Agree.

The writer for the story is "A former corporate attorney at Shearman & Sterling, he is a professor at the Michael E. Moritz College of Law at The Ohio State University."

As such he is looking at what structures could be possible instead of what happens actually in negotiation because you have to get agreement on both sides. While of course he could be correct, (we don't know the exact details so we can't rule that out) there is the possibility that those wouldn't have been terms agreed upon even if proposed.

The title of the story was "How Instagram Could Have Cut a Better Deal". Well they also could have cut a better deal by getting twice the amount they got even with the same terms or all in cash, right?

It's ironic as well since to most outside observers Instagram did quite well.

dahotre• 14 years ago

OMG! The 13 guys at Instagram are not going to end up with approx $100,000,000 each. Instead they might get something around $22,000,000 in cash and more than $50,000,000 in Facebook stocks. I hope they can survive on that meager earnings.

steve8918• 14 years ago

This article is ridiculous. Even if the deal were for $300M cash only, it would have been an amazing coup. $300M for a company with 30M users and ZERO revenues? They infrastructure costs were pure spending and eating away at cash, and they had no idea how low their user base would drop to if they tried even a modicum of monetization, like ads or subscriptions.

The fact they got 23M shares of FB is simply delicious gravy on top. This means they get to participate in any upside on FB for free. The only thing that would suck is if they were somehow taxed on the value of FB shares when the deal went down, but I'm not even sure that would occur. I'm sure there's a way to structure the deal so that they wouldn't need to pay taxes until they sell the shares.

ChuckMcM• 14 years ago

It is interesting how folks miss the article for the headline. The headline is link baitey, the article tries to explain a financial device called a 'stock collar' which is known in M&A circles but not be common knowledge for startup founders.

I read it as, "Hey, here is this financial tool to consider when selling your company called a stock collar, and here is an example of how using it would have been advantageous." That is a reasonable thing for someone to know.

peloton• 14 years ago

The point of the article is not to argue valuation. Rather, it's about the negotiation that happens between both sides' bankers to make sure their respective clients are getting the best deal structure.

In my opinion the writer is one of the best at detailing corporate deals and making the complexities of investment banking easily understandable for the general public.

olog-hai• 14 years ago

From the article: "It may also be that since the parties were both in the same industry, a fixed exchange ratio was thought more appropriate because the market would assign them equally in value, a common assumption underlying this choice."

Would some kind soul please explain what the author meant by "the market would assign them equally in value?" Thanks.

sjg007• 14 years ago

Why do we care? It's a done deal and was done 3 months ago. Stupid.

How Instagram Could Have Cut a Better Deal

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