Zuckerberg negotiated Instagram deal without Facebook board approval | Hacker News Reader

Zuckerberg negotiated Instagram deal without Facebook board approval

arstechnica.com

138 points3lit3H4ck3r78 comments

Things people seem to keep forgetting through this entire affair:

1) Zuck, with his 57% voting proxy, has absolute control over the company. He doesn't need to consult anybody for his decisions, even Sandberg or the board.

2) With that said, he made sure they voted. The board still needs to vote for it to be legal, but if they were to vote it down, Zuck could simply remove the dissident board members with his 57% share.

3) This acquisition was defensive, not offensive, in nature. Yes, Facebook could have created its own filters, but it was worried that Instagram could become THE social network for sharing images. That would be bad for Facebook, since that's it's the undisputed leader in that space. Zuck knew it would be more expensive to leave Instagram independent than to take it out now for a high price.

4) No matter who acquired Instagram, there were going to be conflicts of interest. Twitter's CoI is actually worse -- it's Executive Chairman, Jack Dorsey, was an angel investor in Instagram. This is why Zuck doesn't make investments, I suspect.

I'm not a huge photo-sharer, and I certainly don't claim to be an expert on the space, so forgive my ignorance when I ask if photos is really a billion dollar beach head - a 1% of Facebook billion dollar beach head.

Did Facebook simply look at their activity, determine that 25% of their engagement is driven by photosharing, and decide that 1% of the company was more than reasonable to protect that space? Or something to that effect?

Something like that. Facebook saw that Instagram was adding users fast and dominating mobile (a weakness of Facebook's). The plurality, if not the majority, of Facebook activity revolves around photo sharing and photo interactions (photos get way more engagement than the sharing of links).

So Zuck decided to take them out of the competitive landscape now, while it could still afford to, rather than risk Systrom turning Instagram into a major social network that siphoned away significant amounts of activity from Facebook.com

If that's really the case then there's no way Facebook is worth what (most) people think. Instagram launched in October 2010 and were acquired with only 13 employees. If a tiny company like that even has a chance to dent Facebook's market position then they are in an extremely precarious spot, IMHO.

More startups like Instagram are going to appear. No one can predict when or where but given the low barrier to entry, it's going to happen. If it costs Facebook $1B per "bullet" to kill them then they are going to run out of bullets.

A lot of startups "like" Instagram already exist, but ONLY Instagram has 40+ million users, that's the difference. Just because 100 more startups get created in this space doesn't mean any of them will acquire a sufficient userbase to threaten Facebook.

I'm thinking that his point (which I agree with) is that if a photo-sharing app with twelve people and no revenue can come from nowhere in less than two years to threaten Facebook's very existence, Facebook may not be worth $100 billion. I think the crux of this debate is whether you think Instagram was poised to become a real threat in the social space to Facebook. I think Facebook overreacted, and given this information (that Zuckerberg essentially bought it up himself) the disconnect from a realistic valuation seems even more likely. But then again, they may never get a chance to buy up companies with stock that possesses so much hype.

True. But on the other hand, look at RIM (Blackberry) and Apple (iPhone). Any large incumbent can be displaced. They take longer to die because they have cash, but they die nonetheless.

"Everything is worth what its purchaser is willing to pay for it"

I'll go off on a limb and posit that Facebook's real worth is a lot less than 100billion. It is still a huge amount but for now I would not say 100 billion. If so then they just bough Instagram for more than 1% of Facebook's worth (If it was mainly cash). Pure guest: 3%-5%. I would not be surprised if it was higher.

However, if they purchased Instagram with mainly Facebook stock then it doesn't really matter since at such a high Facebook valuation, Facebook probably got a nice deal (because I don't think 100 billion is the right valuation).

One reason I think this is that I'm remembering the high valuations that Yahoo and AOL used to have.

Not if they paid most with FB stock valued at around $100 billion. Some caveats apply I'm sure, but I have a feeling FB will trade around $100 billion. Whether it's a good investment at $100 b or not it's a different matter, and people can disagree

I too think that Facebook will trade around 100 billion, at first. My gut feeling is that eventually the stock will settle down to its true value.

Think about it, a lot of people do believe that Instagram had a real chance of taking Facebook out.

To put it in perspective, I do not believe there has been a startup that google has bought because there was a chance it would take them out. The main thing that google does is search, and they still do it better than anybody else. Facebook on the other hand seems to have a lot less moat, as evidenced by this purchase.

If their moat is that weak than 100 billion is too risky. It could implode at any moment. The next startup or the next hot new thing could take them out.

FB is probably going to trade at $100 billion day one, maybe a get 20% jump on excitement and I think they will keep that way for quite a few quarters as they ramp up monetization. IMO, they should not trade at $100 billion to begin with but then they have almost a billion people glued to their network. When you take China out, kids and truly old people and you're talking an insane % of the world's online population.

>"Think about it, a lot of people do believe that Instagram had a real chance of taking Facebook out."

Who, pray tell, would these people be? Because that's a ludicrous assertion.

I'll argue by analogy here: I don't know anyone who uses Instagram. Everyone I know uses Facebook. Instagram was making zero dollars. Facebook is generating cash in the billions. Instagram has 30MM users. Facebook is approaching a billion.

Instagram has some strategic value to Facebook, obviously. But I don't know how anyone can claim that these companies are competitors.

>>"Think about it, a lot of people do believe that Instagram had a real chance of taking Facebook out."

>Who, pray tell, would these people be? Because that's a ludicrous assertion.

Well, I would guess the 'hip' people who write for the startup blogs (i.e., Pando, TechCrunch, RWW, etc.) think so, but I think among normal people, we would agree that was a ludicrous assertion.

yeah agreed...I mean Yahoo bought Flickr for 35 million...so how is Instagram worth 28x that.

When Yahoo bought Flickr there was no mobile market. What people get used to using all the time on their phones is a big deal, for many people, their smart phone is now the main way they browse the web and it is quickly becoming common way for them to upload pictures and participate in social media. You can move 40 million people's habits, but not easily.

"... I'm not a huge photo-sharer, and I certainly don't claim to be an expert on the space, so forgive my ignorance when I ask if photos is really a billion dollar beach head ..."

Good question that I was also questioning why until I found this quote:

"... Posts that include a photo album or a picture generate about 180% and 120% more engagement than the average post respectively, according to Facebook’s internal data. ..." ~ https://www.facebook.com/business/fmc/guides/bestpractices?c...

I suspect the purchase was specifically in response to this metric.

I have a slightly different and gut-feel driven take on this. Much of Facebook's valuation is dependent on the potential of the company to monetize its user base at a much greater level in the future. This is commonly referred to the 'narrative' that investors and markets like.

Of late, that narrative has been wearing a bit thin. They're adding users at a crazy pace, but monetization has not kept pace and by the time the IPO comes out, by virtue of more actual information being public, the buzz around the company will take even more of a hit.

Instagram is only step towards shoring up that narrative and once they go public, I'll expect more such deals to come through. They did not acquire the company because they were scared of it.

With that, I'll end my amateur attempt at mind reading :)

Won't there at some point be a fiduciary duty to involve the shareholders of an acquisition of this magnitude?

I'm sure he has some legal responsibly like that but it is up to shareholders to prove he failed...

Even if they wanted to try to do that such action wouldn't seem likely as that might interfere with the IPO / eventual stock price and would interfere with their wishes to make a load of cash on the IPO.

In short do you take a shot at the head of a company about to make you a ton of money even if you think they've made mistakes? Probably not.

In fact from my understanding from institutional investors they often are privy to concerns, actions, and screw ups by companies they're heavily invested in, but don't raise concerns because ... they're heavily invested and don't want to rock the boat if it is doing well otherwise.

> Won't there at some point be a fiduciary duty to involve the shareholders of an acquisition of this magnitude?

There was. That is what several members of the board represent: They are chosen by the shareholders.

I have no idea about broad meetings, how many % do you need in meetings to make such a move?

I was under the assumption you only need over 50%, which he has already. Or is it different US?

Bullshit. I presume Zuckerberg is making these claims to remove the board members -- many of whom also happened to be Istagram investors -- from any suspicion of wrongdoing. But clearly the price jump just prior to Facebook's acquisition lends credence to reports that many of Facebook's board will walk away with boatloads of cash from this deal. They were certainly under pressure to complete this prior to going public next month.

I doubt that. They were going to make "buttloads of cash" anyway when the IPO goes through. I doubt they'd risk something insidery as that to get a few more.

Marc Andreessen and Peter Thiel were on both sides of this deal: http://www.donnaklinenow.com/investigation/instagram-scam

That article is bonkers.

Eg Marc is not a General Partner at Benchmark. He might be a Limited Partner which actually just means "investor."

Oh please. You could fill a very large book with the stories of people who went to jail because, despite huge amounts of wealth, they did something insiderish for a few dollars more.

I always have to think as the proverbial conniving "gangsta" about stuff like this. If you had a way to make $1 billion by getting yourself a secure $3 billion loan that could easily be paid off by another company you have influence in, would you do it?

It's common sense. The thing is, I think it was a good buy, similar to Google and YouTube.

Am I reading this wrong, or there's generally a negative attitude towards this news?

It seems that people are upset that a 27 year-old, who's worth ~30Bn on paper, could buy a 1Bn dollar company for breakfast without any adult supervision.

The negativity weirds me out. Aside for the personality traits, why doesn't everyone want to be where Zuck's at?

In my opinion, no one should be asking "why Zuck was able to do it", but rather ask "what should I do to be in the position to do the same?"

I see some negativity, but I also see some head scratching. My response is the latter.

No matter your net worth, even Warren Buffet would do a bit more footwork before deciding to wake up one morning and spend a billion dollars on something.

Perhaps Zuck would have found out that Sequoia just valued the company for 25% of the price Systrom was asking? Or do you think the mere act of starting a larger disclosure process would get leaked out and shoot the value up to 1 billion anyway?

Actually, Warren Buffet is known for deciding to by companies within in a 10 minute phone call. (But that's because he is always researching companies, so he knows what a good one looks like)

Most famously, he was following IBM for 50+ years until he decided time was right to purchase.

You're not reading it wrong. People are looking for a reason to be negative because they are predisposed.

Just to further extend this point, I feel that PG's comment - "closed -> negotiated" - hasn't gotten enough attention.

Think about this. Not only Zuck changed the rules on control (taking as much power as he could in his hands), he's also changed the way M&A talks are conducted, thereby helping all of us who are still working towards our first billion.

Think how often you hear stories of M&A deals fall through because large companies end up screwing entrepreneurs. Now, if the new standards for negotiation is 3 days, more people would be able to sleep at night. After all, you can now confidently go in, name a price, negotiate on it for an hour, and then close and go one with your life, building a stronger company. Isn't it what you'd want anyway?

Bad headline by Ars. They lead with this quote:

    The board, according to one person familiar with the matter
    "Was told, not consulted."

But follow up with the important bit:

    Facebook's board did vote on the deal, according to people familiar 
    with the matter, though it was largely symbolic.

The take-away is that they trust Zuck fully, but they still voted. He did garner approval from the board.

The original WSJ article is worth reading:

http://online.wsj.com/article/SB1000142405270230481840457735...

I'm not terribly versed in board voting policies. But if Zuck has 57% of the voting shares is there a way for the board to block this if they wanted to? Or I guess more precisely, aren't all the FB board votes symbolic?

There may be minority protections and veto rights on things like acquisitions, company-sale and other substantive decisions.

Edit: FB's probably in league of it's own though (as someone else mentioned, the S-1 filings would likely have the kind of info I'm referring to)

No, the board votes are binding. But Zuck has complete control over the composition of the board, so he can pack it with whoever he wants. He can also remove members of the board at will. There is probably a limit to how much crazy shit he could pull before he would start to have trouble finding qualified people willing to serve on the board (which would probably in turn tank FB's stock price), but I don't think this comes anywhere close to that limit. It seems to me that this was a sound acquisition notwithstanding the potential conflicts of interest, and that Zuck used his authority in exactly the way that he should have to get it done with dispatch.

It will be interesting to see what happens the first time he uses his authority to do something really questionable.

Interesting in yesterdays Daily Telgraph there was a comment on Googles share price drop and how Wall Street wasn't keen on companies with multiple share classes.

Not a surprise. A Facebook insider told me recently that "It's Mark's company." Nothing happens without his approval, and, in fact, he controls it completely. Just look at the blocks of shares he controls as revealed by the S-1.

I seriously doubt he makes a move without Sandy's approval.

It doesn't surprise me at all either -- it has anti-CEO written all of it.

Edit: Which to me isn't a bad thing necessarily.

The board was aware of the deal, voted in favor of it, and many of the board members benefitted immensely through their stakes in Instagram. But now Zuckerberg claims that it was solely his decision? It looks Facebook is working to distance the conflicted parties from this situation.

Interesting. There are of course several people who doubt the actual recusal of the board from the deal, but when you look at this from a pure Facebook perspective, and not a board member perspective, it does make immense sense to purchase Instagram.

Instagram is pretty much the perfect way to take pictures and share them, so FB picking them up for $1b is actually akin to Google's purchase of YouTube. The notion that Zuckerberg did not consult the board is very logical as well - he knows the scrutiny they are all under, and such a critical deal getting substantively tainted by conflicts of interest would cause many issues in the long run.

The drum beat of "Instagram scam" posts and commentary about the conflicts of interest would be far worse if the deal were known well ahead of time. Zuckerberg is no fool and I'd expect him to be truthful in saying that the board had no knowledge - it is to their direct advantage to do so.

But for $1B, couldn't facebook just reimplement Instagram's interface and forcefeed it to facebook users? It's not like it needs the Instagram network, right?

Reimplementing it would take time, and as with any large software project, there's no guarantee of success. How much do you think Google spent on G+, between wages, acquihires, and the like? Would it not have made more sense had they just bought facebook? G+ is still a nascent, fragile, pseudo-success. Facebook was proven and growing when Google made their offer.

Facebook could have remade Instagram, but there's no guarantee users would like it. Instead, now they have Instagram, its users, its growth, and its cachet; they've solved the photosharing hole in their app in one fell swoop.

Sometimes it's better to pay more for a sure thing. Plus, they got 12 new employees, so it's really only about $83MM each...

Agreed; FB could try to re-implement, but there is no guarantee they'd come even close to what Instagram had accomplished.

In cases like this, it makes more sense to purchase someone with momentum rather than try and build it yourself.

I'm pretty sure Google would have bought Facebook if they could have. Facebook was not for sale.

Re-implementation means that they would be second or third to market. You have to be first in a new category, and Instagram defined the mobile/social sharing space.

You only have to be first to get the network, and they already have the network.

Ebay tried building a Paypal killer and was not successful even though they owned the network. They ended up buying Paypal and killing their own offering because no one was using it. It has been said many times now that buying Paypal was one of the best decision by Ebay management.

The thing a lot of tech people don't understand (including a few of the commenters here) is how important Instagram is in friend circles that aren't ours :P

I've never even felt the need to use Instagram, but two friends of mine (17 and 15) can't stop using it. They told me "no one shares pictures on Facebook anymore, it's just not cool." I mean, with how rapidly the Facebook demographics shift, we'd be making a huge error in assuming that Instagram isn't vital just because we have no use for it. Actually, we could draw a parallel to Pinterest's early lack of support in male-dominated VC circles. At the end of the day, 40m people love Instagram, and 40m is a good chunk of Facebook's market.

> The report says he was afraid of Mr. Systrom reacting negatively had he been approached through lawyers first.

That doesn't make sense. You can certainly reach a tentative deal in person and then have lawyers take care of the details, which doesn't preclude bringing it to the board. In fact, I know this is very common specifically because many lawyers complain that they feel that their jobs are simply to codify agreements that have already been essentially decided before they were even consulted. (To be fair, aside from possibly being insulting to the lawyer, this does make lawyers' lives harder, much the same way that it's always better to go to a lawyer saying 'Here's a document - should I sign it?' as opposed to 'Here's the contract I signed - now please tell me my rights'.)

If they don't like getting paid $500+ an hour to draft contracts perhaps they should find a different job.

Also, I pay my lawyer for advice as to the legal risks of my conduct, not to dictate my conduct, I can't make his job harder, only make it take longer which should make him happy as he gets paid by the hour.

If I'm willing to sign contracts with out consulting him that create legal risk for myself why should he care? His job is simply to inform me that what I signed gave me these risks.

Someone getting $500 an hour should be a little more respectful as to what their job actually is, and why their clients retain them.

Similarly when I consult, I give advice, if the customer wants to build something that I don't think will appeal then in end that is what gets built along with all the risks inherent in that decision.

Somewhere there are some lawyers saying the exact same thing about someone they hired to build them a website. "Seriously... this kid started complaining when I told him I wanted it like X, and he said it should be like Y cause it'll be easier and quicker. I make the decisions, why should he care? He's just a code monkey and I pay him by the hour. He should be happy I'm even paying him at all. Ungrateful shit."

As well they should. People get paid to do a job. I stopped arguing with people long ago about what is best. If someone wants a site that does X, I might suggest that Y would work better but if they want X i do that. It's all about being professional.

In past HN threads, people wondered why Mark wanted to keep control of the majority of Facebook shares... Well the reason is he wants control precisely to be able to do these sorts of deal. He wants to buy a company when he wants to without involving Facebook's board of directors. He wants to run his company the way he wants. I totally respect and understand that.

Original: http://news.ycombinator.com/item?id=3856515

So, reading between the lines, does this mean a) Systrom threw out the $2B number just to say "no, but if you really want it, this is what I'll take" and b) Zuckerberg had no idea Instagram had just closed their latest round and/or had no idea what the valuation was?

"I'm the M&A master, bitch!"

I am sure we would all love to be in a position where we can have a straight conversation with another company and after that conversation solely choose to spend $1B on acquiring them.

Strategically I am missing why Instagram is even viewed as a threat to Facebook. It seems like a complementary service. If Instagram tried to go the route of forcing you to be a member and only share photos with other Instagram users, nobody would use it. Facebook and Twitter provide the platform for Instagram to exist.

Probably because Instagram could ease users' transition to another social site. If something like Google+ hit it off with everybody and they could move all of their pictures with the press of a button and keep their Instagram UI, that lowers the barriers of entry for people to come along and steal FB's cake.

I'm not sure about US law, but in Australia the directors could be personally in breach of their statutory duties by (even symbolically) approving such a transaction without checking it out.

This was a huge transaction by anyone's standard – it could definitely be argued that the directors weren't acting with the required standard of care by approving it so quickly and readily, which puts them in a really awkward place; damned if they do, removed from the board if they don't.

Again, this is in the context of Australian corporate law, but I imagine it's not incredibly dissimilar in the US.

Zuckerberg had a failed takeover attempt similar to the Yahoo-Facebook deal in 2009 with Twitter. Perhaps this time he was determined to close it.

http://www.businessweek.com/technology/content/mar2009/tc200...

closed -> negotiated

Take the same situation but replace "Mark Zuckerberg" with "Steve Jobs" and most people would just nod and see it being business as usual.

Would that have been true when Jobs was 27? Evidently not since it was around that time that he was booted from his own company.

I've heard from insiders that Microsoft M&A almost always goes through the finance/model/quantitative motions, but sometimes Gates (in the past) and Ballmer just get into a straight bidding war, consequences be damned.

People used to go to jail for this type of shit.

When we had fiscal oversight and corporate law.

When has quarrels between the board and the CEO of non-public companies ever been the concern of criminal law?

Oh, mostly around the turn of the century with rail, oil, and steel trusts.

Just for clarity, i'm not claiming anything like is happening now.

Now you've tickled my curiosity. Do please elaborate?

I guess i don't have an example. apparently JP Morgan used to like to lock people in his library till he got his way - but this specific case is other bank owners, not his board http://en.wikipedia.org/wiki/Panic_of_1907

Andrew Carnegie negotiated deals between companies he controlled, collecting commission on both sides of the deals. I vaguely remember that being pretty contentious.

False imprisonment and collusion are exiting, must have overshadowed the exact circumstances in my memory.

Do you have an example? The bits that I recall are all government vs trust instead of board + government vs CEO.

When the other board members bring charges ... Which they might or might not, depending on the true financial picture of FB.

I am certain I would take offence at 1bn being spent on my behalf without prior consultation. Its actually a criminal offence and possibly could construe false accounting. Do you know what those words mean? Spending money demands a paper trail and minuted meeting notes. Or used to.

If you can now spend that amount without due ovetsight its no wonder we're financially shafted.

He's not the Emporor. Bitch.

This is still a privately held company. Everyone who owns shares know damn well that Zuck holds a controlling interest and can has the full authority and right to do these kinds of deals with minimal oversight. They've conceded fiscal oversight for a big payday.

On the contrary. When one straight up owns a controlling interest in the BOD, one gets to do whatever the fuck one wants.

In 3 years from now, Zuckerberg will be seen as a genius. He will extend facebook advertising to Instagram as well and be break even in 3 years. You will see :-)

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