April 18, 2012
Zuckerberg's Folly
Posted by Gordon Smith

How much will Facebook pay for Instagram? The reported figure is $1 billion, roughly 30 percent in cash and the other 70 percent in Facebook stock. Many observers thought the price was high (read: outrageous), but with today's revelation that Zuckerberg negotiated the deal largely without board input, the price just went up.

The Facebook Prospectus warns investors that Zuckerberg has complete control of the company -- risk factors include "Our CEO has control over key decision making as a result of his control of a majority of our voting stock" and "We have elected to take advantage of the 'controlled company' exemption to the corporate governance rules for publicly-listed companies" -- but most of us assumed that Facebook's board would play an important advising role in the company. Apparently, not so much:

Negotiating mostly on his own, Mr. Zuckerberg had fielded Mr. Systrom's opening number, $2 billion, and whittled it down over several meetings at Mr. Zuckerberg's $7 million five-bedroom home in Palo Alto. Later that Sunday, the two 20-somethings would agree on a sale valued at $1 billion.

It was a remarkably speedy three-day path to a deal for Facebook—a young company taking pains to portray itself as blue-chip ahead of its initial public offering of stock in a few weeks that could value it at up to $100 billion. Companies generally prefer to bring in ranks of lawyers and bankers to scrutinize a deal before proceeding, a process that can eat up days or weeks.

Mr. Zuckerberg ditched all that. By the time Facebook's board was brought in, the deal was all but done. The board, according to one person familiar with the matter, "Was told, not consulted."

Maybe the Instagram purchase will be a great thing for Facebook, but that's not the point. Facebook is gearing up for an IPO, and Zuckerberg is acting like he is running a sole proprietorship. If Zuckerberg is this cavalier about corporate governance on the cusp of the Facebook IPO, imagine how he will run his company after he has the money.

We may never know the true cost of Instagram, but Facebook stock is 70 percent of the consideration, and it just took a hit.

Corporate Governance, Facebook | Bookmark

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