Analytics are adding value to companies without ever producing anything including revenue. It seems all a company has to do is display the millions of visitors it has on its site and it will be valued at a billion dollars.
The acquisition of Instagram by Facebook (News - Alert) seems logical in a strange and convoluted way because the value of both companies initially was based on potential. Facebook is slowly earning money but not at the rate investors would like.
Instagram, on the other hand, is a different story.
Instagram statistics suggest the firm has more than 80 million registered users, 4 billion photos uploaded, 5 million photos per day, 575 likes per second and 81 comments per second. What that translates to is a company with no revenue, $2.7 million in losses and only $5 million in the bank.
And depending who you ask, Facebook paid too much.
The media made it seem like there were hundreds of suitors trying to buy Instagram, but according to CEO Kevin Systrom, “no one else put and official offer for the company.”
Rumors of Apple (News - Alert) and Twitter were interested in the company were just that – rumors. And it is probably why Facebook paid twice the evaluation of the company.
The reason for the hasty purchase could be Facebook was working on its own photo sharing service, but it was not as polished as what Instagram was using. The final purchase price was $735 million with $300 million in cash, and the remaining $435 million in Class B shares.
Systrom’s goal was to get 1 percent of the outstanding Facebook shares for his shareholders. The deal was finalized after a fairness hearing was held by the California Department of Corporations in San Francisco.
Initially the deal was valued at about $1 billion but Facebook did not want to pay cash. The cash amount, which remained the same, was for $300 million. The remainder amount was to be paid with 23 million Facebook shares.
At that time, the buzz surrounding the Facebook IPO was optimistic to say the least, and the price they agreed regarding the value of a share was $30. Most of us know what happened to the stock, and that’s why the deal ended up at $735 million instead of $1 billion – a loss of almost $300 million.
The haste of Facebook was also responsible for Instagram not drafting a better proposal for the deal. Their experience was glaringly on display by not agreeing to a floating share exchange ratio or a stock collar, but since they didn’t have any revenue and there were no real suitors for the company, $735 million is not a bad payday.
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Edited by Braden Becker