Facebook’s $38 share price would make its deal to buy Instagram worth nearly $1.2 billion, up from the roughly $1 billion price the company announced in April.
That’s a nice little bump, but the deal hasn’t gone through given regulatory reviews. On top of that, we don’t know the restrictions on the shares like when they vest or if they’re subject to a lock-up period. Plus, shares may pop tomorrow and their value will probably fluctuate a lot by the time six-month lock-up date hits. When Facebook agreed to buy Instagram, it said it would pay with $300 million in cash and 22,999,412 shares of stock. That stock is now worth nearly $874 million, creating a $1.17 billion price tag.
Originally, Facebook said the deal was going to close by the end of June, according to its IPO filing. But now it appears that it may take longer because of a more thorough FTC investigation. There’s a requisite investigation if a deal is more than $66 million. But because of the more than $1 billion price that Facebook paid and the reach of both companies, the commission is said to be looking a little bit more closely at the deal, a source with knowledge of the talks tells us. The FTC usually doesn’t publicly confirm investigations until they’re over, and hasn’t publicly confirmed if they’re doing one on this deal.
But there is evidence that it’s taking longer than expected. Facebook changed its IPO filing earlier this month by amending a sentence projecting a second quarter close for the Instagram deal. It now forecasts a close sometime by the end of the year. If the government blocks the deal, Facebook has agreed to pay Instagram a $200 million kill fee, according to its IPO filing.
Because of this, Instagram’s dozen or so employees haven’t even started at Facebook. They’re still in limbo and they’re working from their San Francisco headquarters on the app, instead of Facebook’s Menlo Park office. Meanwhile, Facebook is also trying to improve its own mobile offerings; it recently boosted the size of photographs in the mobile news feed, making the overall experience more Instagram-like.
While the deal is ultimately expected to go through, a Facebook-Instagram acquisition poses several challenges for the FTC. For one, the FTC’s merger guidelines happen to focus a lot on pricing power, and how a merger would affect a company’s ability to raise prices and decrease output. But both Facebook and Instagram give their products away for free.
The other components of the FTC and Department of Justice’s guidelines have to do with market share. They’ll add up the square of different market shares for competing firms, creating a number called the Herfindahl-Hirschman Index. If it’s above 2500, then the market is highly concentrated. If it’s below 1500, then it’s unconcentrated.
But again, it’s not clear how this applies in a market where companies can rise and fall so quickly. Instagram basically appeared out of nowhere. It racked up nearly 40 million users in about 18 months. Plus, the time it takes for any given company to gain millions of daily active users is declining, partly because of the virality of the Facebook platform itself and then because the iOS and Android platforms are finally reaching scale.
So how do you apply a formula like this when changes in market share are so dynamic? The last time the FTC took a close look at a consumer web deal of this size, it was back in 2009 with the $750 million Google-Admob acquisition. The commission unanimously closed it after Apple entered the competitive field with its acquisition of rival mobile ad network Quattro, which became iAd. However, there hasn’t been a smartphone app deal of comparable size to Instagram — yet.