How Instagram Lost Millions By Selling To Facebook
August 21, 2012

Instagram Losing Money Through Lower Facebook Stock Prices

Michael Harper for — Your Universe Online

Earlier this spring, Facebook announced their intentions to purchase Instagram for a whopping $1 billion. The story would soon become one more tale for which small businesses and Internet businesses to measure their success against.

Now, the New York Times is suggesting perhaps Instagram didn´t get the best deal they could from Facebook´s $1 Billion offer, saying Instagram should have insisted on being paid in cash, rather than shares of Facebook stock.

The Social Network's stock prices have continued to slowly fall since their IPO earlier this year and, as such, the 23 million shares which were paid out to Instagram are rapidly losing their value.

When the two finally struck the deal, shares of FB were $30, already $8 less than when the company went public. At the time of this writing, shares of FB have fallen to $19.48, nearly half of its original value.

According to the New York Times´ calculations, Facebook´s poor stock performance means the fabled $1 Billion acquisition can now be valued at a large and yet, significantly smaller $735 Million. This means the founders of Instagram, Mike Krieger and Kevin Systrom, have now lost as much as $300 million from the deal.

Had the 2 founders bargained differently, says the Times, they could have avoided this entire situation and watched from afar as Facebook shares slowly burn away.

Specifically, Instagram could have insisted on a floating share exchange ratio or a stock collar, 2 popular options when companies merge together, says the Times.

In a floating share exchange ratio agreement, the seller, in this case, Instagram, is promised a certain amount of paid value, despite what happens to the shares of the purchaser, or Facebook in this instance.

So, had Facebook met or exceeded the general public´s expectations, (which were ridiculously high going in to the IPO) Instagram would have walked away from a good bit of money. On the other hand, had Facebook´s IPO gone poorly (which it generally did) Kreiger and Systrom would have been protected and earned a locked in value on their promised shares.

According to the Times, Instagram could have also asked for a stock collar, which ensures that even if the seller had asked for a fixed number of shares, they will still be fairly compensated and protected from a failing stock. Just as in the floating share exchange ratio, Instagram would have given up some perks and extra cash in exchange for some protection by seeking out these measures in their deal.

It is unclear why Instagram did not seek out any of these protective measures in their acquisition, suggesting either a top-notch sales pitch by the Facebook team or a bit of simple greed on Instagram´s end.

In the weeks leading up to Facebook´s IPO, expectations were high that the social giant would perform exceedingly well, making their investors and shareholders incredibly wealthy. A botched opening bell and some rather questionable day-of behavior later, Facebook continues to struggle to meet expectations and become the Wall Street success so many people had assumed they would be.

The final deal between Facebook and Instagram is still pending antitrust clearance from American regulators, though the Times says recent reports show Facebook is trying to speed up this process. In the end, Facebook and Instagram´s hasty deal and signings is what could have hurt Instagram the most, netting them a loss of millions and millions of dollars had they simply taken their time.