To win over Instagram,Facebook was forced to show its hand. Facebook bought the photo-sharing service for $1 billion in early April,agreeing to pay roughly 30% in cash and 70% in stock,according to people briefed on the negotiations who did not want to be identified because the discussions were private. At that level,Facebook is pegging its own stock price at roughly $30 a share. Based on those numbers,the giant social network is valued at north of $75 billion.
But Facebook could actually be worth more. During the negotiations with Instagram,the parties framed the deal around a logical assumption: Facebook could soon trade publicly at a much higher market value. As part of the talks,the companies discussed a potential value of about $104 billion for Facebook,these people said. One of Instagrams founders,Kevin Systrom,first broached the number.
At $104 billion,the value is roughly in line with where Facebook has at times traded on the secondary market: shares of the privately-held company have been selling for as high as $40.
While Facebook executives did not promote the higher value,the figure helped the Instagram team assess the deal. When Facebook goes public,Instagrams chief executive and investors could reap some extra profit on the shares of the social networking company. The reverse is true if Facebook does not fare well in its initial public offering.
Previous internet deals may give Instagrams owners some cause for optimism. Amazon.com,for instance,bought Zappos in 2009,giving the shareholders of the shoe retailer 10 million shares,worth $807 million,plus some cash and additional restricted stock. Those 10 million shares are now worth $1.9 billion.
Although deal talks will not dictate Facebooks eventual price in the market,the acquisition could offer some insight on how the management team may be valuing Facebook ahead of its highly anticipated offering. The company,which is currently in the process of making final changes to its prospectus,is expected to go public next month. The price of the offering will be determined by several factors,like market demand and the volatility in the equity markets.
Investor demand for IPOs has been mixed of late. Several internet companies that went public in recent months are trading below their offering prices. Shares of Groupon,which were sold at $20 late last year,are currently selling for around $12. The online games company Zynga is roughly flat.