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If I were a facebook shareholder, I would be livid right now. This was definitely an inside deal/giveaway that resulted in facebook having to pay much more for

by hristov 15y ago

If I were a facebook shareholder, I would be livid right now. This was definitely an inside deal/giveaway that resulted in facebook having to pay much more for the company than it would have.

PatrickTulskie 15y ago
Why? Facebook knew about the series B that Instagram took. They could have pulled out at any point if the acquisition didn't make any sense.
- hristov 15y ago
  Exactly. They could have also demanded that the series B does not take place. And they did neither of these things. Which most likely means the people that made the decision did not have the best interests of the company in mind. It is not that complicated. Let's say there is X amount of economic benefit from the deal. Initially (i.e. before the series B) that benefit would be shared between Facebook and the initial (i.e., before the series B) shareholders of instagram. Facebook would get the benefit of owning the company minus the purchase price and the investors would get the purchase price. But after the series B there is another party, the new Instagram shareholders which must also share in that benefit. This means that either Facebook or the initial shareholders or both get less benefit than they would have gotten if the series B had not happened. So who got less benefit? Well in these cases one just has to ask oneself who is likely to make a decision against their own benefit. And when you look at people making decisions against their own benefit it usually the ones with the longest and remotest chain of fiduciary duties that do it. So I guessed that it was facebook that might have done it because it has much more and more remote shareholders, so it is more likely someone may have slipped up on their fiduciary duties. But I do not know for sure. It could have been the instagram owners or old shareholders that got screwed. In any event, it is quite certain that one or both of them did get screwed.
hemancuso 15y ago
Facebook's core feature, apart from the graph, is photo-sharing. Instagram is the only company at the moment who has any real chance at building a base to compete with Facebook on photos right now. Looking at this from a $/engineer or $/user seems misleading. I have got to imagine that managing future competition motivates this move. That being said, it seems absurdly expensive. I'm surprised they didn't try to add photo-filters to their mobile app first. I don't think people are going to spend the next decade taking retro pictures. Just like with location - they could've added the feature to their app, people can "be part of location" without having to join a new network. Over time, most people get bored of filtering their photos and move on. By putting that feature in mobile app, Facebook likely could've done a bit put the curb on Instagram from ever pivoting away from filters into a full fledged photo-sharing network and saved themselves a billion.
- hristov 15y ago
  I am not arguing whether this was a good acquisition. The acquisition itself seems to make sense. But it is rather bizarre that they would allow this financing to take place which would do nothing but add to the price of acquisition.
paul 15y ago
I am a facebook shareholder, and your argument makes no sense. Zuck will do what he thinks is best for Facebook, and that doesn't include giving money away to "insiders".
- hristov 15y ago
  My argument is this Series B deal added significantly to the cost of the purchase without adding to the value of the purchase. Since Facebook certainly knew it was happening it is hard to believe they allowed it to happen. But I suppose if you do have trust in Zuck you do not have to look too closely at the details of deals like this. In any event, who am I to say anything, I am not in fact a facebook shareholder. I am just your average HN procrastinator. I am sure you know how to look after your own interests.
  - paul 15y ago
    What makes you think that it added to the cost of the deal? If anything, a better case could be made that the Instagram shareholders gave up $50M.
    - hristov 15y ago
      You could be right. As I mentioned at least one side of this trade gave up money so that the Series B investors could get a quick 100% profit, and I am not sure which. I assumed it was Facebook because of (1) the seemingly high purchase price (2) the way the rumored final price was a neat 2x multiple of the Series B valuation (3) the fact that Facebook by virtue of being a much larger company with much more shareholders would seem to have longer and more nebulous fiduciary duty connections than Instagram. But I admit, all of those reasons are quite speculative. I could be wrong. It could be that the Instagram shareholders knowingly gave up some of the purchase money in order to have funding in case the deal fell through.
      - paul 15y ago
        Obviously Facebook would have liked to pay a lower price (and I'm sure they've made previous offers which were turned down by Instagram). Raising this money strengthened Instagram's bargaining position, which is why it was a smart move for them.

by hristov 15y ago

If I were a facebook shareholder, I would be livid right now. This was definitely an inside deal/giveaway that resulted in facebook having to pay much more for the company than it would have.

PatrickTulskie 15y ago

Why? Facebook knew about the series B that Instagram took. They could have pulled out at any point if the acquisition didn't make any sense.

hristov 15y ago
Exactly. They could have also demanded that the series B does not take place. And they did neither of these things. Which most likely means the people that made the decision did not have the best interests of the company in mind. It is not that complicated. Let's say there is X amount of economic benefit from the deal. Initially (i.e. before the series B) that benefit would be shared between Facebook and the initial (i.e., before the series B) shareholders of instagram. Facebook would get the benefit of owning the company minus the purchase price and the investors would get the purchase price. But after the series B there is another party, the new Instagram shareholders which must also share in that benefit. This means that either Facebook or the initial shareholders or both get less benefit than they would have gotten if the series B had not happened. So who got less benefit? Well in these cases one just has to ask oneself who is likely to make a decision against their own benefit. And when you look at people making decisions against their own benefit it usually the ones with the longest and remotest chain of fiduciary duties that do it. So I guessed that it was facebook that might have done it because it has much more and more remote shareholders, so it is more likely someone may have slipped up on their fiduciary duties. But I do not know for sure. It could have been the instagram owners or old shareholders that got screwed. In any event, it is quite certain that one or both of them did get screwed.

hemancuso 15y ago

Facebook's core feature, apart from the graph, is photo-sharing. Instagram is the only company at the moment who has any real chance at building a base to compete with Facebook on photos right now. Looking at this from a $/engineer or $/user seems misleading. I have got to imagine that managing future competition motivates this move. That being said, it seems absurdly expensive. I'm surprised they didn't try to add photo-filters to their mobile app first. I don't think people are going to spend the next decade taking retro pictures. Just like with location - they could've added the feature to their app, people can "be part of location" without having to join a new network. Over time, most people get bored of filtering their photos and move on. By putting that feature in mobile app, Facebook likely could've done a bit put the curb on Instagram from ever pivoting away from filters into a full fledged photo-sharing network and saved themselves a billion.

hristov 15y ago
I am not arguing whether this was a good acquisition. The acquisition itself seems to make sense. But it is rather bizarre that they would allow this financing to take place which would do nothing but add to the price of acquisition.

paul 15y ago

I am a facebook shareholder, and your argument makes no sense. Zuck will do what he thinks is best for Facebook, and that doesn't include giving money away to "insiders".

hristov 15y ago
My argument is this Series B deal added significantly to the cost of the purchase without adding to the value of the purchase. Since Facebook certainly knew it was happening it is hard to believe they allowed it to happen. But I suppose if you do have trust in Zuck you do not have to look too closely at the details of deals like this. In any event, who am I to say anything, I am not in fact a facebook shareholder. I am just your average HN procrastinator. I am sure you know how to look after your own interests.
- paul 15y ago
  What makes you think that it added to the cost of the deal? If anything, a better case could be made that the Instagram shareholders gave up $50M.
  - hristov 15y ago
    You could be right. As I mentioned at least one side of this trade gave up money so that the Series B investors could get a quick 100% profit, and I am not sure which. I assumed it was Facebook because of (1) the seemingly high purchase price (2) the way the rumored final price was a neat 2x multiple of the Series B valuation (3) the fact that Facebook by virtue of being a much larger company with much more shareholders would seem to have longer and more nebulous fiduciary duty connections than Instagram. But I admit, all of those reasons are quite speculative. I could be wrong. It could be that the Instagram shareholders knowingly gave up some of the purchase money in order to have funding in case the deal fell through.
    - paul 15y ago
      Obviously Facebook would have liked to pay a lower price (and I'm sure they've made previous offers which were turned down by Instagram). Raising this money strengthened Instagram's bargaining position, which is why it was a smart move for them.