In this day and age,
technology advancement had greatly changes the lifestyle of people. Back in the
80-90’s, gadgets like tablets and smartphones were not even exist. In contrast,
we can see that most of the people, including us are holding a smartphone in
every corner of the world. Besides, technology advancement had also changes the
way of communication as in online chatting which is driven by social media.
Facebook is ranked top 1 for having more than 2billions monthly active users
and Instagram is ranked top 3 for a billion users. Well, I am not surprised by
the unbelievable figures as almost every friends and relatives of mine are the
loyal customers of these two social medias. Nevertheless, these two giant
social media companies are controlled by the same boss, which is CEO of
Facebook, Mark Zuckerberg. Specifically, Facebook had acquired Instagram on
year 2012 for nearly $1billion USD yet Instagram was only launched for 2 years with
13 employees at the time. The acquisition of Instagram was the 40th
M&A transactions of Facebook and it was the third largest acquisition among
its history.
In the process of
acquisition, the fund was allocated by $300million in cash and $700millions
worth of shares. In my opinion, the allocation was effective and well balanced
as there are advantages and disadvantages for both approach. The advantage for
the shareholders of Instagram receiving 23million shares that worth $700million
throughout the acquisition is that they are able to maintain an interest in the
combined entity. For example, they will be involved in decision making process
and also entitled to receive dividends from profits. However, the positions of
Facebook’s shareholders was diluted because there are more shares issued hence
decreasing the weight for existing shareholders in the company. Issuing new
shares to fund the acquisition could also benefit Facebook because the outflow
of cash can be mitigated thus increasing the liquidity for company. In
contrast, the drawback of Facebook paying $300million in cash for the
shareholders of Instagram is that they might be responsible for capital gains
tax throughout the acquisition. This is very undesirable for the shareholders
because a good number of tax paid would cut down their profits. In addition,
the disadvantage for Facebook can be easily found because they might face cash
flow strain in short term. For instance, if there are financial crisis or any
terrible events occur right after the acquisition, it would put Facebook in a
bad situation as they are lack of cash to deal with the problems.
As of today, we can
conclude that the acquisition is successful as Instagram is now making around
$1billion in every quarter, which is close to $4 billion of Facebook’s $20
billion annual ad revenue. At the time when the acquisition was just finished,
Instagram has only 35million users and it has increased in five-fold in just 2
and a half years. At the year of 2016, the monthly active users of Instagram
had already reached to 600million which shows an astonishing growth rate.
However, Facebook was criticized by many others few years back then for the
acquisition on a new start-up tech company. In an episode of “The Daily Show”,
Jon Stewart was sarcastically saying ““A billion dollars of money?! For a thing
that kind of ruins your pictures? The only Instagram worth a billion dollars
would be an app that instantly gets you a gram.” Apparently, not much people
were really understood the vision that Mark Zuckerberg had on the acquisition.
He knew that Instagram had a promising future and might be a difficult
competitor in the near future. Therefore, he chose to be friends instead of
fighting it as an enemy.
No comments:
Post a Comment