A lot has been discussed recently about Facebook’s IPO and the current price of shares in the social network. Yesterday, Facebook shares plummeted to half the value that they first went on sale at, down to as low as $18.75 (from $38, the value when the company first floated in May). You might think it is all doom and gloom for the social network. Well, not in terms of Facebook’s purchase of Instagram.
The deal, agreed in April, would see Facebook pay $300 million in cash and 23 million shares of common stock in exchange for Instagram. At that time, shares were trading around the $31 mark, giving Instagram a total price tag of around $1 billion. However, with shares now trading around $19 the picture changes somewhat, with Instagram now seemingly costing Facebook only $735 million acquire.
However this is all relative, as the same number of shares (and therefore the same percentage of Facebook’s own shares) are being handed over in this deal, so it’s not quite as sweet at it might appear on the surface. After all, share price is a perceived value that only becomes realised for the investor when shares are sold. But the deal could have been constructed more carefully, as The New York Times notes.
Unlike the vast majority of acquisition deals, there was no floating share exchange ratio in place for either party. This would have protected both Facebook and Instagram from any major fluctuation in share price, yet instead of signing for a fixed-dollar value, they signed for a fixed number of shares.
So even though Facebook has still handed over the same number of shares originally agreed, it could have had to stump up as many as double that amount if there had been a share-value clause in the agreement. I think Mr Zuckerberg and co. will treat this as good news in light of the social network’s current woes on Wall Street.