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Picture This: Instagram Loses $300 Million in Value in About Four Months


The Facebook stock collapse is doing the photosharing company founders no favors.

MINYANVILLE ORIGINAL Hindsight is 20/20, and for the founders of Instagram, it's surely worth $300 million.

In April, the red-hot social photo-sharing application was acquired by Facebook (FB) in exchange for $1 billion. However, only $300 million was paid out in cash, with the remaining $700 million paid in the form of some 23 million Facebook shares, which were valued by both parties at about $30 per share at that time.

As we all know, Facebook shares have fallen off a cliff since its May IPO, now hovering just above the $19 mark. As such, Instagram has seen its value plunge by $300 million, on paper at least, in a mere four months.

At the New York Times, Steven Davidoff writes that Instagram co-founders Kevin Systrom and Michel Krieger could have avoided this massive loss had they chosen other payment options used in mergers.

One option the company could have used, for example, is the principle of the floating share exchange ratio, in which case it would have locked down the value it received because Facebook would have to increase or cut the number of shares issued to match the agreed-upon price of $700 million in shares.

Did Instagram commit a huge gaffe by selecting a fixed share exchange ratio? Davidoff seems to believe so, saying that the $300 loss "is a lesson for those who strike deals in the heat of the moment - and perhaps too hastily."

However, it could be argued that the Instagram team has already made out like bandits. At the Atlantic Wire, Rebecca Greenfield writes, "[L]et us not forget that $738 million is a lot of money for a photo app company with 13 employees. Even if Facebook's stock sinks to $0, these guys still get $300 million."

Clearly, Instagram decided to roll the dice on Facebook shares, believing that the stock would soar. It may seem unbelievable now, but the hype around Facebook was enormous in the lead-up to its IPO, and it swept many an investor. But, it was a calculated risk, and it simply did not pay off. As JD Rucker at Techi writes:

In hindsight, Instagram probably should have cut a different deal with Facebook rather than go along for the ride with the majority of the purchase tied to stock without the protections that most mergers of this type carry. In hindsight, Yahoo (YHOO) should have bought Google (GOOG) and sold to Microsoft (MSFT). Blockbuster should have bought Netflix (NFLX). News Corp (NWS) should have never bought MySpace. Digg should have sold when it was 10X its final sale price.

Twenty-twenty. That's what hindsight is.

Then again, perhaps if the folks at Instagram had read Minyanville and our alarm-bell sounding on Facebook way before its IPO, we would not be talking about this $300 million loss right now.

Twitter: @sterlingwong
No positions in stocks mentioned.
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