Monday, April 9, 2012

Facebook's Instagram Acquisition Doesn't Add Up

While the market was hit with jobs data and the indexes dropped, a rather large acquisition was gaining the attention of the stock markets, Twitter, and private equity websites around the country. The announcement of Instagram’s acquisition by Facebook (FB) for $1 billion in cash and stock seemed to set off news of an overpayment by the company. With Facebook set to go public in May, the deal appears set to make sure Facebook is the place to log into and share photos. Facebook Chief Executive Officer and Founder Mark Zuckerberg shared the acquisition with Facebook users. In a letter Zuckerberg discussed how Instagram will create the best photo sharing experience for Facebook users.

Facebook will keep the Instragram company separate from Facebook and will keep its staff of thirteen people. Zuckerberg already discussed that he will allow Instagram users to share pictures on other social networks including Google’s (GOOG) Google+. It will be interesting to see how long this independence lasts and if Facebook can find a way to make others pay for the service if not logged into Facebook.

Instagram began as an Apple (AAPL) product used on iPhones and iPads. The application quickly shot up the list of top downloads on iTunes. As of today, the application is still in the top ten free applications downloaded.

In April, Instagram opened its services to Google and the Google Play marketplace. In less than one day, the application has over one million downloads on the Android platform. We will have to wait and see how long it takes the Google Play marketplace to cross the ten million download marks but it appears to be only a matter of time.

The problem I have with the acquisition is there isn’t a real value for Facebook in the acquisition. Instagram currently does not charge for its application or service. The majority of the photos are uploaded on Facebook. Other services used are Twitter, Google+, and FourSquare. I think Facebook overpaid for Instagram and will eventually need to charge money for people to use the service. A billion dollars is a lot of money for any company to pay for an acquirer but Facebook is in a difficult position since they are going public soon. I have read through the Facebook S-1 and it was nice to see that they had some cash going into its IPO but now they have depleted much of their war chest. I have to agree with the writers who say that Facebook was scared and made the acquisition to prevent rivals from taking over Instagram and also to keep its photo sharing market strong.

Instagram was valued at $500 million in its most recent round of private equity funding. It is rumored that Twitter, Google, and Facebook all had approached the company about a buyout. It appears that Facebook won the race and may have likely paid more than the others were willing to spend on the two year old company.

Instagram has over 27 million users, according to TechCrunch, and is set to hit 50 million from the Android launch this past week. Twitter was blowing up today with tweets about people saying they would be deleting their photos and Instagram accounts because of Facebook’s takeover. The fact of the matter is that the buyout could actually cause a spike in the number of downloads for the application due to an abundance of free advertising in the media.

The acquisition marked the first of 2012 by Facebook. At a billion dollars it is also the highest price paid by Facebook for another company. The move also breaks away from Facebook’s normal strategy of acquiring companies for their employees rather than the intellectual property. Analysts call the move similar to the YouTube acquisition by Google for $1.65 billion. Google has found ways recently to monetize the site’s large number of daily views. Perhaps Facebook will find a way to make more money off of the millions of photos uploaded each month using Instagram.

Facebook will be the hottest IPO in May and the buzz now starts a little earlier with this acquisition. Facebook will likely talk about the purchase in subsequent conference calls as I feel analysts will want answers about the hefty purchase price. The deal likely makes the valuation on Facebook worth over $100 billion and puts the shares out of reach for this small time investor.


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  3. Well I hope this decision of Facebook is right. Not sure why they need to buy this social networking site.