

How Instagram Could Have Cut a Better Deal - markszcz
http://dealbook.nytimes.com/2012/08/20/how-instagram-could-have-cut-a-better-deal/

======
jonknee
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...](http://techcrunch.com/2012/05/17/facebooks-38-share-price-makes-
instagram-deal-worth-nearly-1-2-billion/)

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

------
ChuckMcM
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.

------
nchuhoai
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
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.

------
paulsutter
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.

~~~
refurb
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.

------
steve8918
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.

------
codegeek
"$300 million in cash "

Enough said.

~~~
dmishe
This.

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

~~~
ytadesse
It'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
Thank you.

------
andrewhillman
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."

------
atirip
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.

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

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

~~~
tankbot
My guess would be the ever-declining value of FB stock.

~~~
radarsat1
I assume they sold it right away, though I guess there's no way to know.

~~~
johns
My 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.

------
peloton
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
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.

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

------
melvinmt
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
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
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.

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

------
rohit01
It may eventually be a better deal on the long term if FB shares go UP in the
long run :P

------
sjg007
Why do we care? It's a done deal and was done 3 months ago. Stupid.

------
dahotre
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.

