The agreement Facebook struck to acquire Instagram in April is starting to look like a bargain. The value of the deal, which was estimated at $1 billion at the time of its announcement, has since dropped to about $735 million.
Facebook agreed to exchange $300 million in cash and 23 million shares of common stock for the mobile photo-sharing app. At that time, Facebook’s shares were trading at around $31 per share. Those shares were trading just south of $19 Monday morning, less than half the $38 they commanded on IPO day. As a result, the value of Instagram’s sale has dropped by roughly a quarter.
As The New York Times notes, Instagram could have cut a much better deal. Had Facebook or Instagram insisted on a floating share exchange ratio — and the vast majority of acquisition deals have one — they would have both been protected from any major fluctuation (including an upward one) in share price. Instead of signing for a fixed-dollar value however, they signed for a fixed number of shares. Instagram could also have set up a clause that would have allowed the company to cancel the deal in the case of a steep stock price decline.
Perhaps Instagram thought Facebook’s stock had already bottomed at $31, and thought it was worth taking the downside risk. Or perhaps, as The Times suggests, the deal was too hastily negotiated by young executives “inexperienced in the world of mergers and acquisitions.”
But hey, hindsight’s 20/20.
It will still be some time before the deal is complete. British trade regulators approved it early last week, but Facebook still needs permission from American antitrust regulators to move forward. Should the deal fail to go through, Facebook will owe Instagram $200 million in termination fees.
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