The Real Reason Instagram Sold for $1B ….and what it means to you

By now everyone knows that Instagram, a company with 12 employees and no revenue, recently sold to Facebook for $1B.  However, there are a couple of things that you may not be aware of, and one of these was addressed recently in a great article by Peter Lehrman of Axial Market, some of which is paraphrased here.

#1 – Instagram initially wanted a valuation of $2B

#2 – There was a competitive offer from Twitter that helped to drive up the valuation by Facebook

About a week after Facebook announced its $1B acquisition of Instagram, VentureBeat broke the story on Twitter’s secret bid.  They showed how that bid led to Facebook’s “we’ll buy you at any price” panicked offer.  Publicly Facebook’s purchase of Instagram was directly tied to boosting the company’s position in photo-sharing and mobile realms prior to its IPO, but some have proffered that Zuckerberg was anxious to block Instagram from becoming a Twitter property.

Point #1:  Competition among highly qualified buyers is the best way to drive your business value

Why did Facebook want Instagram?  According to Jennifer Van Grove at Venture Beat, Facebook doesn’t need Instagram’s more than 30 million users. And while unquestionably innovative when it comes to rapid photo-sharing, Instagram, as a micro social network, poses very little threat to Facebook. As Zuckerberg insinuated, the services are complementary.

This is all about the photos and what photos mean to Facebook’s mission and service: traction, user engagement, more time on site, new users, and much less risk. The acquisition has everything to do with the social network’s upcoming debut on public market.

Facebook iterated at multiple times in its S-1 that photos are an essential part of its mission and strategy. The social network also disclosed to would-be investors that it could suffer without continued growth in user engagement around photos, and identified mobile has a massive risk.

Point #2  A strategic buyer will almost certainly value your company higher

Another perfect example of competition in action occurred in the last couple of weeks and was somewhat overshadowed by the Instagram deal.  Great Wolf Resorts, a publicly traded company and operator of indoor waterparks with 2,500 employees and nearly $300M in revenue, received a bid to be taken private by Apollo Global Management in March.

With no other bids for nearly three weeks, it appeared that Apollo was going to get the company at only about a dollar per share more than the market price before their bid. Then KSL Capital Partners, a private equity group specializing in resorts, entered the fray. Over the next couple of weeks the two bid and counterbid until Apollo finally won with an offer that was 57% higher than their initial bid. Without competition, they never would have offered as much. It doesn’t matter if the company is a high tech application, a water park company, or an industrial manufacturer, competition helps entrepreneurs hold buyers accountable.

Point #3:  One buyer won’t offer maximum value (you can’t have an auction of one) 

The Take Away:

If you don’t have a system and a process for creating competition between buyers, and if you don’t have a team of advisors who can help you do that, whether it’s your board, your CFO, or a highly qualified M&A advisor, (or all the above), then you’re vastly decreasing the odds of an optimal outcome when it comes time to put a value on your business.

It’s imperative to work with someone who can successfully identify and market you to the right potential buyers and knows how to create a competitive atmosphere by bringing multiple interested buyers to the table.

If you think that you can just put your head down and build a great company and product and that the buyers will pay fair value, take your chances. The reality is that decent companies can drive better valuation outcomes than great companies by creating healthy and authentic competition for the deal.

Any time you are considering your options, let’s talk.  We’ve helped many software and technology companies to grow and to exit successfully.  We are happy to act as a sounding board, provide insight on current market conditions and valuations, and help you to determine what your next move should be.

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