Just came across this BI article saying Twitter missed the opportunity to acquire Instagram, so was inspired to dig up this paper (c. 2013, written for a Negotiations course) detailing the shady dealings on Mark & Kevin’s parts that caused such a miss. Also, fairly appropriate repost timing given the absurd acquisition move Zuck just pulled.
Key takeaway, if nothing else, from below (#soshady):
"…the reality remained that Twitter had actually made an offer of $525M in cash and Twitter shares, but [Instagram CEO Kevin] Systrom very shrewdly chose not to sign anything or even accept anything, telling Twitter to hold onto their offer sheet as Instagram mulled it over."
Mark Zuckerberg is obviously a very intelligent man, but there are honest hustlers and then there are shady hustlers. #giveandtake
Facebook’s Acquisition of Instagram: The $1 Billion Negotiation
MGMT 291: Negotiation and Dispute Resolution (April 22, 2013)
Facebook’s acquisition of Instagram, a social media network built specifically upon sharing beautifully filtered photos with other friends in your network, caused much stir in both the Wall Street and Silicon Valley communities in April 2012. This acquisition marked Facebook’s largest deal to date: Facebook offered to purchase Instagram (comprising of only 13 employees at the time) for approximately $1 billion in cash and stock in April of 2012 (about a quarter of the cash-on-hand they had from the end of 2011. At the time, Facebook – the world’s largest social network with more than 900 million users – was scheduled to hold its IPO soon after in May 2012. The public was intrigued and bit confused by this acquisition, questioning Facebook’s Founder/CEO Mark Zuckerberg’s motives and both parties’ overall handling of the negotiation. Even more interestingly enough, it was discovered after the deal that Instagram had actually been in talks with Twitter, another large player in the social media space. While Instagram denied any formal legally-binding interactions with Twitter, news of the acquisition did not sit well with Twitter and the Facebook-Twitter divide has since then widened. This paper will explore the intricacies and analyze the outcomes of the negotiation, examining from the first phone call to the aftermath of the official final deal.
Facebook is an online social networking service founded in 2004 by Founder/CEO Mark Zuckerberg, pioneering the social media space as the first and now largest player. After Facebook’s IPO in May 2012, the company has now made its way up in the ranks on the Forbes Global 2000 list. Facebook’s user base has grown to 1.06 billion monthly active users as of December 2012. Today, Facebook’s mission is “to make the world more open and connected,” with its next moves predicted to be taking charge in the mobile platform space – a prediction that largely explains Facebook’s motives, which will be explored later in the paper. Instagram, a far smaller and younger player than Facebook, was founded by CEO/Co-Founder Kevin Systrom and Co-Founder Mike Krieger in March 2010 – starting out with only $500,000 – and officially launched in October 2010. The platform is a smartphone application that allows users to take photos, digitally and seamlessly apply filters, and add hashtags to interact with fellow Instagram-using friends. By February 2011, Instagram raised $7 million in funding. In April 2012, Instagram released its Android platform (originally starting out as a platform available only to iPhone users) and shortly after this release – within a matter of days – Zuckerberg reached out to Systrom to signal his interest in acquiring Instagram.
MOTIVATIONS AND INTERESTS
The social media space is constantly changing, and with this next wave of technology intertwining – and at many times defining – consumer’s lives, Facebook has no choice but to keep up. Thus, Facebook is working on ways to be more of a mobile platform rather than a service, a move that many agree is smart and strategic. A large, growing, and hyper-engaged global mobile audience means that “mobile is where it’s at: go mobile or die,” a key factor that was not overlooked by Zuckerberg when deciding to acquire Instagram. In April 2012 – following the public announcement of the acquisition – Instagram revealed that it had reached its 5 billion photo and 30 million user mark. As of the following fall, Instagram has far exceeded the 100 million user mark. However, although some believe that Facebook acquired Instagram for its user base and great growth potential, it is clear that Facebook with its 1.06 billion users is not lacking in the user acquisition department. Rather, Facebook’s focus was on the growth potential aspect, with specific regards to Instagram’s great mobile platform skill. In a blog post for all Facebook users, Mark Zuckerberg expressed his excitement for the future: “[Facebook] cannot wait to work with the talented Instagram team to improve the mobile experience.”
Adding onto Instagram’s success, the company had made with the release of its Android app, surpassing 5 million downloads in six days. This great build-up of momentum for Instagram compelled Facebook to make this deal for two main reasons: 1) To eliminate its biggest competitor and threat in the mobile space, a mobile-only or mobile-first social network capturing the increasing amount of time spent on smartphones in a way that Facebook could not; and 2) To gain a team adept in the aforementioned mobile-first network platform to improve the overall Facebook mobile experience. Facebook openly acknowledged that Instagram does a better job with mobile photos than they could ever do.
The deal was handled in a “markedly start-up way, with Zuckerberg calling Systrom on April 5 and asking for a meeting.” Zuckerberg proceeded to negotiate and wrap up the Facebook-Instagram deal in 3 days, “mostly on his own” hammering out the details in his Palo Alto home with Systrom. (It was later discovered that this location was part of a strategic choice that helped both parties evade any legal issues that arose in hearings following the deal). In this way, Zuckerberg acknowledged that Instagram was still a small company with a team of about a dozen people, and knew that the best foot to put forward would be to talk to Systrom on an entrepreneur-to-entrepreneur level. In this sense, Zuckerberg efficiently leveraged the foundations of relationships and negotiation style for effective negotiating.
It is reported that Systrom opened the negotiation, asking (and anchoring) $2 billion for Instagram. He came to this initial number through a combination of data points, one being Sequoia Capital providing $50 million worth of funding after valuing Instagram at $500 million. The second, and arguably most impactful, being pressure from an informal prior offer by Twitter. Sources revealed that Twitter made a very real (but legally unofficial) offer in the hundreds of millions of dollars range. With both another round of funding secured and an offer from Twitter on the table, Systrom reportedly used as leverage in his negotiations to get the highest price for Instagram. Consequentially, Zuckerberg bid just to block the Twitter deal. Facebook had no comment on the final deal and Instagram had very little, but it is clear what each party’s negotiation leverage was: Instagram had a very competitive BATNA, giving Systrom the confidence to negotiate with a firm upper hand, while Facebook is the social media giant of the 21st century, primed for continual domination of the social media space. Systrom had clearly done his homework and prepared for the negotiation, knowing where to start the negotiations and subsequently also knowing when to walk away, having a base figure in mind.
In response to Systrom’s initial offer, Zuckerberg creatively reframed the offer generation process to link Instagram’s worth to Facebook’s own value, asking Systrom to consider how much Instagram was worth as a percentage of Facebook’s current value (which, at that point, was around $5 billion). Additionally, Zuckerberg also asked Systrom what he thought Facebook would be worth, using the example that if he believed Facebook would one day be worth as much as a company like Google at $200 billion or more, then the equivalent of 1% of Facebook would be sufficient to meet his price. In doing this, Zuckerberg attempted to bring the process back to the standards and norms of traditional ways of valuing a company to the best of his ability, given that valuation by cash flow is ineffective given that Instagram makes only one product and gives it away for free.
The final deal was essentially completed in 48 hours and resulted in Facebook agreeing to pay Instagram $1 billion for the acquisition. The actual payment turned out to amount to $715 million in value. This figure is lower than the famously reported $1 billion figure because of Facebook’s stock price decline since the agreement. More specifically, the deal broke down into $300 million in cash, and 22,999,412 shares; Facebook would be charged $200 million if the agreement fell through. Here, the technicalities and contingency of the payment led to a drastic (almost 30%) decrease in value of the deal; a lesson that Professor Rosner often teaches in class, to be very careful about our so-called “creative” deals because there are always holes that can be poked and parties could end up in an undesirable predicament even though both parties had the best negotiation intentions in mind. However, this predicament cannot be entirely blamed on Facebook’s falling stock prices; Instagram’s owners took the risk of a decline in Facebook shares in exchange for all the benefits of an increase and therefore did not agree to a floating share exchange ratio or stock collar, two common merger tools (amongst many others available ) which would have greatly helped Instagram hedge against the risk. Instagram’s agreement to a fixed number of shares rather than a fixed dollar value notably played a role in the decline in value of the final outcome of the negotiation. This was a clear case of a contingent agreement, the outcome of which greatly affected negotiators’ perceptions of “winning” and “losing.” The process was short, but by no means completely sweet, particularly its aftermath. It was revealed that Zuckerberg handled the deal without consulting the board, but instead simply “told” them about the decision after it was finalized. The Wall Street Journal claims that Zuckerberg actively kept the board out of negotiations, only giving them a 24-hour notice of his intent to spend $1 billion on Instagram before the deal went live. The public found this news to be disconcerting, some interpreting it to be a poor leadership move on Zuckerberg’s part. However, COO Sheryl Sandberg was apparently informed of Zuckerberg’s intent to aggressively pursue the purchase of Instagram from the very beginning even though she did not actively participate in the meetings with Systrom. Regardless of whether or not the board knew, it was clear that this style was necessary given that Facebook was such a big player and needed to get back down to its start-up roots to bring Instagram on the same page. While some negotiations are done most intelligently through the employment of a third-party agent , both parties were able to hold their ground and fared well. In fact, Zuckerberg’s natural negotiation skills are credited for saving Facebook from paying twice the negotiated price, given that by negotiating alone he was able to bypass the board for most of the “acquisition preamble.” Zuckerberg was able to carry the deal through in this way given that he maintains controlling voting shares of Facebook and continues with the clout necessary to successfully drive the social network’s pace forward. Zuckerberg’s spearheading of this deal – without an agent and without needing to cut through the red tape of involving board – took the conversation to a familiar and simple entrepreneur-to-entrepreneur level that provided the environment to facilitate a more efficient deal-making and negotiation process.
Interviews revealed that while Instagram had been talking to other parties, it had never received any other formal offers besides that of Facebook. Countering this argument, Twitter executives and those familiar with the negotiations said that Twitter had been prepared to make higher offers and was essentially blindsided by this deal.
The legal technicalities and implications of Twitter’s apparent engagement before this formal negotiation process were looked into by the Federal Trade Commission, but was deemed clear and thus the acquisition passed. However, even though not many comments have been made and not much information is available regarding any Instagram-Twitter interaction before the final deal, it is clear that there are multiple parts of Instagram’s testimony which don’t quite add up, after close tracing and analysis by The New York Times. When questioned if Instagram had received any other offers besides Facebook’s at the time of the negotiations, Systrom responded that they had “never received any offers.” However, the reality remained that Twitter had actually made an offer of $525 million in cash and Twitter shares, but Systrom very shrewdly chose not to sign anything or even accept anything, telling Twitter to hold onto their offer sheet as Instagram mulled it over. This, in conjunction with other series of events that do not paint Instagram as completely innocent, reveals much about the negotiating style of Systrom and values. While he and Zuckerberg did all things correctly to avoid incrimination from the legal system, it does appear that some of the action behind the scenes was not completely fair play for Twitter.
Photo source: Business Insider
Alden, William. “Before Facebook Deal, Instagram’s Talks With Twitter.” New York Times DealBook, 17 Dec. 2012.
Bilton, Nick. “Disruptions: Instagram Testimony Doesn’t Add Up.” New York Times Bits, 16 Dec. 2012.
Buelens, Marc and Dirk Van Poueke. “Determinants of a Negotiator’s Initial Opening Offer.” Journal of Business and Psychology, 19.1 (2004): 23-25.
Costine, Josh and Kim-Mai Cutler. “Facebook buys Instagram for $1 Billion, Turns Budding Rival Into Its Standalone Photo App.” TechCrunch, 9 Apr. 2012.
Davids, Chris. “Instagram wanted $2bn in Zuckerberg’s secret Facebook negotiations.” Slash Gear, 18 Apr. 2012.
Etherington, Darrell. “Facebook Closes Instagram Acquisition, Instagram Announces 5B Photos Shared.” TechCrunch, 6 Sept. 2012.
Frommer, Dan. “Path and Instagram are making Facebook look incredibly uninventive at mobile.” Splat F, 30 Nov. 2011.
Frommer, Dan. “Why Facebook’s $1 Billion Instagram Deal is Brilliant.” Splat F, 9 Apr. 2012.
Freund, James C. Smart Negotiating: How to Make Good Deals in the Real World. New York: Simon & Schuster, 1993.
Gannes, Liz. “Sequoia Set to Lead $500M Valuation Round for Instagram.” All Things D, 06 Apr 2012.
Geron, Tomio. “Facebook Officially Closes Instagram Deal.” Forbes.com, 06 Sept. 2012.
Greenfield, Rebecca. “Was Instagram Savvy or Stupid When Negotiating with Facebok?” The Atlantic Wire, 20 Aug 2012.
Gross, Doug. “Facebook-Instagram deal highlights Zuckerberg’s hacker spirit.” CNN Tech, 18 Apr. 2012.
Ingraham, Nathan. “Instagram for Android surpasses five million downloads in six days.” The Verge, 10 Apr. 2012.
Kim, Peter H., Robin L. Pinkley, andAlison R. Fragale. “Power Dynamics in Negotiation.” The Academy of Management Review, 30.4 (2005: 799-822).
“Mark Zuckerberg spent $1 billion on Instagram deal ‘without even telling the board.’” Mail Online, 18 Apr. 2012.
McDaniel, Amora. “Instagram has lost nearly $300 million—and it’s not all Facebook’s fault.” Upstart Business Journal, 21 Aug. 2012.
Melanson, Donald. “Facebook completes acquisition of Instagram, eyes improved mobile experience.” Engadget, 06 Sept. 2012.
Moffitt, Michael. Contingent Agreements: Agreeing to Disagree About the Future. Marquette Law Review; Milwaukee, WI. 2004 (Special Issue).
Office of Fair Trading. “Anticipated acquisition by Facebook Inc of Instagram Inc.” Scribd, 14 Aug 2012.
Pierce, David. “Facebook’s Instagram acquisition: the billion-dollar story.” The Verge, 13 Apr. 2012.
Protalinski, Emil. “Why Facebook acquired Instagram for $1 billion.” ZD Net, 09 Apr. 2012.
Rea, Robert H. “Factors affecting success and failure of seed capital / start-up negotiations.” Journal of Business Venturing 4.2 (1989):149-158.
Rusli, Evelyn M. “F.T.C. Ends Investigation on Facebook’s Instagram Deal.” New York Times DealBook, 22 Aug. 2012.
Rusli, Evelyn M. “The Instagram Deal: A Mark Zuckerberg Production.” New York Times DealBook, 12 Apr. 2012.
Savov, Vlad. “Mark Zuckerberg kept Facebook board out of Instagram negotiations, claims WSJ.” The Verge, 2012 Apr. 18.
Scoble, Robert. “First interview of Kevin Systrom, co-founder of Instagram, back in 2010.” Sept 2010.
Shell, G. Richard. Bargaining for Advantage. New York: Penguin, 2006.
Systrom, Kevin. “Instagram +Facebook.” Instagram, 22 Apr. 2013.
Van Grove, Jennifer. “Revealed: How Twitter’s secret offer for Instagram made Facebook pay $1B.” Venture Beat, 26 Apr. 2012.
Wilhelm, Alex. “Facebook’s final Instagram purchase price: $715 million in cash and stock.” The Next Web, 24 Oct. 2012.
Werner, Suzanne.“Negotiating the Terms of Settlement: War Aims and Bargaining Leverage.” The Journal of Conflict Resolution, 42.3 (1998): 321-343.
Wood, Molly. “Facebook buys Instagram…but for what?” CNET, 09 Apr. 2012.
Zuckerberg, Mark. Facebook blog post. Facebook, 9 Apr. 2012.
* Please ignore citation formatting; edited to be Tumblr-friendly.