This was a well known fact from the get go. TechCrunch on May 17th:<p><a href="http://techcrunch.com/2012/05/17/facebooks-38-share-price-makes-instagram-deal-worth-nearly-1-2-billion/" rel="nofollow">http://techcrunch.com/2012/05/17/facebooks-38-share-price-ma...</a><p>> 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.
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.<p>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.
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.<p>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?<p>Always awesome to see people play Captain Hindsight:
<a href="http://www.youtube.com/watch?v=cqkI691dxNg" rel="nofollow">http://www.youtube.com/watch?v=cqkI691dxNg</a>
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.<p>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.
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.<p>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.
Nothing like a writer playing "Monday morning quarterback." I like the closing sentence...<p>"It is a lesson for those who strike deals in the heat of the moment — and perhaps too hastily."
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.
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.<p>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.
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."<p>Would some kind soul please explain what the author meant by "the market would assign them equally in value?" Thanks.
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...
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.