How Instagram Could Have Cut a Better Deal(dealbook.nytimes.com)
dealbook.nytimes.com
How Instagram Could Have Cut a Better Deal
http://dealbook.nytimes.com/2012/08/20/how-instagram-could-have-cut-a-better-deal/
49 comments
To save everyone the math, 23 million shares is now worth ~$458.8 million.
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.
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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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
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
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.
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.
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.
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.
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.
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.
I agree. However, I definitely did not know about those 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.
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.
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.
"$300 million in cash "
Enough said.
Enough said.
$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
1) Photo sharing => not profitable niche 2) Mobile app => hard to monetize
This.
What does "this" mean? I've people use it as a comment, and I also noticed others disliking it.
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.
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.
Thank you.
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."
"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.
Instagram will go down as being a shitty deal for both sides. An arranged marriage, as it were.
Arranged marriages are equally happy as marriages "for love". http://libres.uncg.edu/ir/uncg/f/J_Myers_Marriage_2005.pdf
45 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.
Assuming 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.
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.
>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.
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.
It's not just about finding "the right person". Lots of external factors can have a huge effect on marriage success, like religion http://www.edivorcepapers.com/divorce-statistics/christian-d... or local culture http://www.divorcerate.org/divorce-rate-japan.html or even changes in culture over time http://www.edivorcepapers.com/divorce-statistics/divorce-rat... eta: 50% is not a good rate.
Isn't religion/culture/whatever just one aspect of finding the right person?
If it was, I think it would just be finding someone with similar views. It's interesting that different groups have different success rates.
I'm not saying we search for those who have the same views, I'm saying we search for those whose quirks won't be a problem down the road. For example, I'm non-religious, and I have dated extremely religious people (i.e. she attended church every day). Surprisingly, it wasn't an issue at all.
He's not saying it makes no sense. He's saying arranged marriages have just as high a success rate, if not higher. Personally, I can see that intuitively as well. Expectations are low, and there's not as much "passion". Not a lot of passion sounds bad to a lot of people, but it's better than having tons of passion, and having it turn sour.
Agree that it doesn't prove anything.
Disagree that 50% should be considered a good success rate though.
Disagree that 50% should be considered a good success rate though.
> Disagree that 50% should be considered a good success rate though.
Perhaps this is just a signal that society may be moving past "Till death do us part". I don't think this indicates anything bad about society, except perhaps people forgetting how serious society once treated marriage.
Perhaps this is just a signal that society may be moving past "Till death do us part". I don't think this indicates anything bad about society, except perhaps people forgetting how serious society once treated marriage.
My 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 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.
Even if FB goes bust tomorrow, $300M seems like a pretty damn good deal for Instagram on its own.
Why do you think this will end up being a shitty deal for Instagram?
I 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.
My guess would be the ever-declining value of FB stock.
I assume they sold it right away, though I guess there's no way to know.
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.
I'd sell right away, even only 300 million is better than the nothing instagram has made since it was created.
It 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".
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.
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."
Would some kind soul please explain what the author meant by "the market would assign them equally in value?" Thanks.
Would some kind soul please explain what the author meant by "the market would assign them equally in value?" Thanks.
Instagram "no longer" a $1 billion sale would perhaps be more accurate. Still quite impressive for a zero-revenue service.
I've done this math in my head too much now in the last couple of weeks. Not sure why I care that much.
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...
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.
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.
So at today's FB price, this would put the acquisition price at just over $700 Million.
It may eventually be a better deal on the long term if FB shares go UP in the long run :P
Why do we care? It's a done deal and was done 3 months ago. Stupid.
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.
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.