
Zuckerberg negotiated Instagram deal without Facebook board approval - 3lit3H4ck3r
http://arstechnica.com/business/news/2012/04/zuckerberg-closed-instagram-deal-without-facebook-board.ars?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+arstechnica%2Findex+%28Ars+Technica+-+Featured+Content%29
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Mystalic
Things people seem to keep forgetting through this entire affair:

1) Zuck, with his 57% voting proxy, has absolute control over the company. He
doesn't need to consult anybody for his decisions, even Sandberg or the board.

2) With that said, he made sure they voted. The board still needs to vote for
it to be legal, but if they were to vote it down, Zuck could simply remove the
dissident board members with his 57% share.

3) This acquisition was defensive, not offensive, in nature. Yes, Facebook
could have created its own filters, but it was worried that Instagram could
become THE social network for sharing images. That would be bad for Facebook,
since that's it's the undisputed leader in that space. Zuck knew it would be
more expensive to leave Instagram independent than to take it out now for a
high price.

4) No matter who acquired Instagram, there were going to be conflicts of
interest. Twitter's CoI is actually worse -- it's Executive Chairman, Jack
Dorsey, was an angel investor in Instagram. This is why Zuck doesn't make
investments, I suspect.

~~~
padobson
I'm not a huge photo-sharer, and I certainly don't claim to be an expert on
the space, so forgive my ignorance when I ask if photos is really a billion
dollar beach head - a 1% of Facebook billion dollar beach head.

Did Facebook simply look at their activity, determine that 25% of their
engagement is driven by photosharing, and decide that 1% of the company was
more than reasonable to protect that space? Or something to that effect?

~~~
vaksel
yeah agreed...I mean Yahoo bought Flickr for 35 million...so how is Instagram
worth 28x that.

~~~
bgilroy26
When Yahoo bought Flickr there was no mobile market. What people get used to
using all the time on their phones is a big deal, for many people, their smart
phone is now the main way they browse the web and it is quickly becoming
common way for them to upload pictures and participate in social media. You
can move 40 million people's habits, but not easily.

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nextstep
Bullshit. I presume Zuckerberg is making these claims to remove the board
members -- many of whom also happened to be Istagram investors -- from any
suspicion of wrongdoing. But clearly the price jump just prior to Facebook's
acquisition lends credence to reports that many of Facebook's board will walk
away with boatloads of cash from this deal. They were certainly under pressure
to complete this prior to going public next month.

~~~
jonursenbach
I doubt that. They were going to make "buttloads of cash" anyway when the IPO
goes through. I doubt they'd risk something insidery as that to get a few
more.

~~~
joejohnson
Marc Andreessen and Peter Thiel were on both sides of this deal:
<http://www.donnaklinenow.com/investigation/instagram-scam>

~~~
joshu
That article is bonkers.

Eg Marc is not a General Partner at Benchmark. He might be a Limited Partner
which actually just means "investor."

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kirillzubovsky
Am I reading this wrong, or there's generally a negative attitude towards this
news?

It seems that people are upset that a 27 year-old, who's worth ~30Bn on paper,
could buy a 1Bn dollar company for breakfast without any adult supervision.

The negativity weirds me out. Aside for the personality traits, why doesn't
everyone want to be where Zuck's at?

In my opinion, no one should be asking "why Zuck was able to do it", but
rather ask "what should I do to be in the position to do the same?"

~~~
joezydeco
I see some negativity, but I also see some head scratching. My response is the
latter.

No matter your net worth, even Warren Buffet would do a bit more footwork
before deciding to wake up one morning and spend a billion dollars on
something.

Perhaps Zuck would have found out that Sequoia just valued the company for 25%
of the price Systrom was asking? Or do you think the mere act of starting a
larger disclosure process would get leaked out and shoot the value up to 1
billion anyway?

~~~
prewett
Actually, Warren Buffet is known for deciding to by companies within in a 10
minute phone call. (But that's because he is always researching companies, so
he knows what a good one looks like)

~~~
sireat
Most famously, he was following IBM for 50+ years until he decided time was
right to purchase.

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hemancuso
Bad headline by Ars. They lead with this quote:

    
    
        The board, according to one person familiar with the matter
        "Was told, not consulted."
    

But follow up with the important bit:

    
    
        Facebook's board did vote on the deal, according to people familiar 
        with the matter, though it was largely symbolic.
    

The take-away is that they trust Zuck fully, but they still voted. He did
garner approval from the board.

The original WSJ article is worth reading:

[http://online.wsj.com/article/SB1000142405270230481840457735...](http://online.wsj.com/article/SB10001424052702304818404577350191931921290.html)

~~~
mikeryan
I'm not terribly versed in board voting policies. But if Zuck has 57% of the
voting shares is there a way for the board to block this if they wanted to? Or
I guess more precisely, aren't all the FB board votes symbolic?

~~~
lisper
No, the board votes are binding. But Zuck has complete control over the
composition of the board, so he can pack it with whoever he wants. He can also
remove members of the board at will. There is probably a limit to how much
crazy shit he could pull before he would start to have trouble finding
qualified people willing to serve on the board (which would probably in turn
tank FB's stock price), but I don't think this comes anywhere close to that
limit. It seems to me that this was a sound acquisition notwithstanding the
potential conflicts of interest, and that Zuck used his authority in exactly
the way that he should have to get it done with dispatch.

It will be interesting to see what happens the first time he uses his
authority to do something really questionable.

~~~
mjwalshe
Interesting in yesterdays Daily Telgraph there was a comment on Googles share
price drop and how Wall Street wasn't keen on companies with multiple share
classes.

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jgrahamc
Not a surprise. A Facebook insider told me recently that "It's Mark's
company." Nothing happens without his approval, and, in fact, he controls it
completely. Just look at the blocks of shares he controls as revealed by the
S-1.

~~~
OzzyB
It doesn't surprise me at all either -- it has anti-CEO written all of it.

Edit: Which to me isn't a bad thing necessarily.

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wunderland
The board was aware of the deal, voted in favor of it, and many of the board
members benefitted immensely through their stakes in Instagram. But now
Zuckerberg claims that it was solely his decision? It looks Facebook is
working to distance the conflicted parties from this situation.

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kposehn
Interesting. There are of course several people who doubt the actual recusal
of the board from the deal, but when you look at this from a pure Facebook
perspective, and not a board member perspective, it does make immense sense to
purchase Instagram.

Instagram is pretty much the perfect way to take pictures and share them, so
FB picking them up for $1b is actually akin to Google's purchase of YouTube.
The notion that Zuckerberg did not consult the board is very logical as well -
he knows the scrutiny they are all under, and such a critical deal getting
substantively tainted by conflicts of interest would cause many issues in the
long run.

The drum beat of "Instagram scam" posts and commentary about the conflicts of
interest would be far worse if the deal were known well ahead of time.
Zuckerberg is no fool and I'd expect him to be truthful in saying that the
board had no knowledge - it is to their direct advantage to do so.

~~~
Estragon
But for $1B, couldn't facebook just reimplement Instagram's interface and
forcefeed it to facebook users? It's not like it needs the Instagram network,
right?

~~~
redthrowaway
Reimplementing it would take time, and as with any large software project,
there's no guarantee of success. How much do you think Google spent on G+,
between wages, acquihires, and the like? Would it not have made more sense had
they just bought facebook? G+ is still a nascent, fragile, pseudo-success.
Facebook was proven and growing when Google made their offer.

Facebook could have remade Instagram, but there's no guarantee users would
like it. Instead, now they have Instagram, its users, its growth, and its
cachet; they've solved the photosharing hole in their app in one fell swoop.

Sometimes it's better to pay more for a sure thing. Plus, they got 12 new
employees, so it's really only about $83MM each...

~~~
kposehn
Agreed; FB could try to re-implement, but there is no guarantee they'd come
even close to what Instagram had accomplished.

In cases like this, it makes more sense to purchase someone with momentum
rather than try and build it yourself.

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got2surf
The thing a lot of tech people don't understand (including a few of the
commenters here) is how important Instagram is in friend circles that _aren't_
ours :P

I've never even felt the need to use Instagram, but two friends of mine (17
and 15) can't stop using it. They told me "no one shares pictures on Facebook
anymore, it's just not cool." I mean, with how rapidly the Facebook
demographics shift, we'd be making a huge error in assuming that Instagram
isn't vital just because we have no use for it. Actually, we could draw a
parallel to Pinterest's early lack of support in male-dominated VC circles. At
the end of the day, 40m people love Instagram, and 40m is a good chunk of
Facebook's market.

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chimeracoder
> The report says he was afraid of Mr. Systrom reacting negatively had he been
> approached through lawyers first.

That doesn't make sense. You can certainly reach a tentative deal in person
and then have lawyers take care of the details, which doesn't preclude
bringing it to the board. In fact, I know this is very common specifically
because many lawyers complain that they feel that their jobs are simply to
codify agreements that have already been essentially decided before they were
even consulted. (To be fair, aside from possibly being insulting to the
lawyer, this does make lawyers' lives harder, much the same way that it's
always better to go to a lawyer saying 'Here's a document - should I sign it?'
as opposed to 'Here's the contract I signed - now please tell me my rights'.)

~~~
fleitz
If they don't like getting paid $500+ an hour to draft contracts perhaps they
should find a different job.

Also, I pay my lawyer for advice as to the legal risks of my conduct, not to
dictate my conduct, I can't make his job harder, only make it take longer
which should make him happy as he gets paid by the hour.

If I'm willing to sign contracts with out consulting him that create legal
risk for myself why should he care? His job is simply to inform me that what I
signed gave me these risks.

Someone getting $500 an hour should be a little more respectful as to what
their job actually is, and why their clients retain them.

Similarly when I consult, I give advice, if the customer wants to build
something that I don't think will appeal then in end that is what gets built
along with all the risks inherent in that decision.

~~~
drgath
Somewhere there are some lawyers saying the exact same thing about someone
they hired to build them a website. "Seriously... this kid started complaining
when I told him I wanted it like X, and he said it should be like Y cause
it'll be easier and quicker. I make the decisions, why should he care? He's
just a code monkey and I pay him by the hour. He should be happy I'm even
paying him at all. Ungrateful shit."

~~~
fleitz
As well they should. People get paid to do a job. I stopped arguing with
people long ago about what is best. If someone wants a site that does X, I
might suggest that Y would work better but if they want X i do that. It's all
about being professional.

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mrb
In past HN threads, people wondered why Mark wanted to keep control of the
majority of Facebook shares... Well the reason is he _wants_ control precisely
to be able to do these sorts of deal. He wants to buy a company when he wants
to without involving Facebook's board of directors. He wants to run his
company the way he wants. I totally respect and understand that.

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stevenj
Original: <http://news.ycombinator.com/item?id=3856515>

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joezydeco
So, reading between the lines, does this mean a) Systrom threw out the $2B
number just to say "no, but if you _really_ want it, this is what I'll take"
and b) Zuckerberg had _no idea_ Instagram had just closed their latest round
and/or had no idea what the valuation was?

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samstave
"I'm the M&A master, bitch!"

I am sure we would all love to be in a position where we can have a straight
conversation with another company and after that conversation solely choose to
spend $1B on acquiring them.

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dkrich
Strategically I am missing why Instagram is even viewed as a threat to
Facebook. It seems like a complementary service. If Instagram tried to go the
route of forcing you to be a member and only share photos with other Instagram
users, nobody would use it. Facebook and Twitter provide the platform for
Instagram to exist.

~~~
bgilroy26
Probably because Instagram could ease users' transition to another social
site. If something like Google+ hit it off with everybody and they could move
all of their pictures with the press of a button and keep their Instagram UI,
that lowers the barriers of entry for people to come along and steal FB's
cake.

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alastairpat
I'm not sure about US law, but in Australia the directors could be personally
in breach of their statutory duties by (even symbolically) approving such a
transaction without checking it out.

This was a huge transaction by anyone's standard – it could definitely be
argued that the directors weren't acting with the required standard of care by
approving it so quickly and readily, which puts them in a really awkward
place; damned if they do, removed from the board if they don't.

Again, this is in the context of Australian corporate law, but I imagine it's
not incredibly dissimilar in the US.

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spullara
Zuckerberg had a failed takeover attempt similar to the Yahoo-Facebook deal in
2009 with Twitter. Perhaps this time he was determined to close it.

[http://www.businessweek.com/technology/content/mar2009/tc200...](http://www.businessweek.com/technology/content/mar2009/tc2009031_743025.htm)

------
pg
closed -> negotiated

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biot
Take the same situation but replace "Mark Zuckerberg" with "Steve Jobs" and
most people would just nod and see it being business as usual.

~~~
dkrich
Would that have been true when Jobs was 27? Evidently not since it was around
that time that he was booted from his own company.

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carguy1983
I've heard from insiders that Microsoft M&A almost always goes through the
finance/model/quantitative motions, but sometimes Gates (in the past) and
Ballmer just get into a straight bidding war, consequences be damned.

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Craiggybear
People used to go to jail for this type of shit.

When we had fiscal oversight and corporate law.

~~~
mseebach
When has quarrels between the board and the CEO of non-public companies ever
been the concern of criminal law?

~~~
jfoutz
Oh, mostly around the turn of the century with rail, oil, and steel trusts.

Just for clarity, i'm not claiming anything like is happening now.

~~~
mseebach
Now you've tickled my curiosity. Do please elaborate?

~~~
jfoutz
I guess i don't have an example. apparently JP Morgan used to like to lock
people in his library till he got his way - but this specific case is other
bank owners, not his board <http://en.wikipedia.org/wiki/Panic_of_1907>

Andrew Carnegie negotiated deals between companies he controlled, collecting
commission on both sides of the deals. I vaguely remember that being pretty
contentious.

False imprisonment and collusion are exiting, must have overshadowed the exact
circumstances in my memory.

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bluelu
In 3 years from now, Zuckerberg will be seen as a genius. He will extend
facebook advertising to Instagram as well and be break even in 3 years. You
will see :-)

