Instagram a Huge Loser In Facebook Deal

Peter Roesler, President - Web Marketing Pros

By Peter Roesler

President, Web Marketing Pros

When Facebook acquired Instagram, the deal was valued at near $1 billion. Today, its value has dropped about $300 million, as Facebook’s price in the stock market has plunged by almost 50% since its IPO in the spring.

The deal was announced by Facebook CEO Mark Zuckerberg last April, and is now worth in the neighborhood of $735 million. This is because Instagram failed to negotiate any protections in the deal.

According to industry reports, when the two firms negotiated the deal, the terms gave Instagram $300 million in cash and the rest was allocated in shares – about 23 million in total.

That was a good deal for Instagram when the deal was first announced. When the deal was inked, Facebook’s shares were worth $30, and that price went up to $38 after the IPO. The price then climbed to $40 when the stock first started trading, but since then the price keeps dropping.

The deal would have worked out better for Instagram if the start up had done a better job of including some protections for itself.

For example, it could have insisted on a protection that is known as a floating share exchange ratio. This would have given Instagram an amount of shares that would have kept that deal at $1 billion in value.

Also, the firm could have put in a stock collar. This would have prevented the deal from going up or down 5% either way. This would have allowed Instagram to grab some of the gains if the stock were to improve. This also would have protected Instagram from massive losses if the price fell, which is what occurred.

It appears that either inexperience or over confidence in Facebook’s stock price kept Instagram from engaging in more effective negotiations. All in all, a costly lesson learned for Instagram.


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