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How Instagram Could Have Cut a Better Deal
- atirip 14y agoTL;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.
- debacle 14y agoInstagram will go down as being a shitty deal for both sides. An arranged marriage, as it were.
- memnips 14y agoWhy do you think this will end up being a shitty deal for Instagram?
- tankbot 14y agoMy guess would be the ever-declining value of FB stock.
- radarsat1 14y agoI assume they sold it right away, though I guess there's no way to know.
- johns 14y agoMy guess is that they haven't acquired it yet since the deal isn't closed. The deal was also pre-IPO, so I believe they'd be subject to the same freeze.
- thatusertwo 14y agoI'd sell right away, even only 300 million is better than the nothing instagram has made since it was created.
- debacle 14y agoI guess it really depends. I, personally, would never see a 300 million plus exit as a shitty deal, however they could have been the next $n billion dollar IPO.
- archangel_one 14y agoEven if FB goes bust tomorrow, $300M seems like a pretty damn good deal for Instagram on its own.
- sp332 14y agoArranged marriages are equally happy as marriages "for love". http://libres.uncg.edu/ir/uncg/f/J_Myers_Marriage_2005.pdf http://libres.uncg.edu/ir/uncg/f/J_Myers_Marriage_2005.pdf
- blackjack160 14y ago45 arranged marriage individuals in the study. 24 of them over the age of 45. Not sure how this satisfaction study can be considered conclusive in any context.
- sp332 14y agoMy point is, I'm not aware of any evidence that arranged marriages are in general a crappy deal for both sides. I found that paper while looking for a full text of this one http://psycnet.apa.org/psycinfo/1985-19991-001 http://psycnet.apa.org/psycinfo/1985-19991-001 which demonstrates that objective measures of love increase over time with arranged marriages and decrease with marriages for love. These papers have small sample sets because they're exploratory and pointing directions for future research, which as far as I can tell, never happened on a large scale.
- jmathai 14y agoAssuming you're comparing arranged marriages to "love marriages" I wouldn't even bother. In the US the divorce rate is somewhere near or above 50%. Logically "love marriages" make plenty of sense but the data proves (in the US at least) that it doesn't work. At least not once the human factor is taken into account. People from cultures where arranged marriage is not acceptable seem to have a very hostile view on it. There's good and bad but having come from that culture as I grew older I began to see the benefits.
- duaneb 14y ago>proves No, it doesn't. To actually prove love marriages do not make sense, every single love marriage should fail. Anyway, 50% is a pretty damn good success rate, I think. I don't think I could choose someone to spend the rest of my life with correctly on my first time. It's perfectly natural to fall out of love - that doesn't mean that love marriages don't work, it just means that some don't work.
- duaneb 14y agoIt 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 14y agoThis was a well known fact from the get go. TechCrunch on May 17th: http://techcrunch.com/2012/05/17/facebooks-38-share-price-makes-instagram-deal-worth-nearly-1-2-billion/ 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 14y agoTo save everyone the math, 23 million shares is now worth ~$458.8 million.
- memnips 14y agoInstagram "no longer" a $1 billion sale would perhaps be more accurate. Still quite impressive for a zero-revenue service.
- melvinmt 14y agoI've done this math in my head too much now in the last couple of weeks. Not sure why I care that much.
- tommoor 14y agoThis 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 14y agoDuring 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 14y agoThe 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 14y agoI agree. However, I definitely did not know about those alternative structures.
- refurb 14y agoThese 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 14y agoSo at today's FB price, this would put the acquisition price at just over $700 Million.
- andrewhillman 14y agoNothing 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 14y agoIt may eventually be a better deal on the long term if FB shares go UP in the long run :P
- codegeek 14y ago"$300 million in cash " Enough said.
- dmishe 14y agoThis.
- rokhayakebe 14y agoWhat does "this" mean? I've people use it as a comment, and I also noticed others disliking it.
- ytadesse 14y agoIt's another way of "liking" the comment or voting it up. The user is essentially saying "I agree with this". People sometimes flag such comments because: 1) The upvote mechanism was created for 'this' purpose. 2) These types of comments don't necessarily add much value to the threads and the community at large is very protective and self-governing in terms of maintaining the integrity of the site. ... Personally, I don't care. I'm sure I've 'this'd comments before in one form or another.
- rokhayakebe 14y agoThank you.
- AznHisoka 14y 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 14y agoSaying 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 http://www.youtube.com/watch?v=cqkI691dxNg
- larrys 14y agoAgree. 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 14y agoOMG! 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 14y agoThis 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 14y agoIt 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.
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- peloton 14y agoThe 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 14y agoFrom 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 14y agoWhy do we care? It's a done deal and was done 3 months ago. Stupid.