Remember just last month when Facebook bought Instagram for $1 billion, "agreeing to pay roughly 30 percent in cash and 70 percent in stock, according to people briefed on the negotiations .... At that level, Facebook [was] pegging its own stock price at roughly $30 a share." (Source) More precisely, "Facebook paid 23 million shares of Facebook common stock as well as $300 million in cash" to buy Instagram. (Source)
At today's price of $28.11 per share of Facebook common stock, the price for Instagram has fallen to a total of $946.5 million.
This drop raises a couple of questions. Most stock acquisition merger agreements have a provision for adjusting the number of acquirer shares to be issued in the event the acquirer's stock price changes between the signing of the merger agreement and closing. Many also have a floor at which, if the acquirer's stock price drops below it, the deal terminates. Does the Facebook-Instagram have such a provision?
Second, back when the Instagram deal was first announced, I noted that Instagram CEO Kevin Systrom could face potential liability under cases like Smith v. Van Gorkom. In particular, it seems his board was informed of the deal rather than making an informed decision to approve it. In addition, Facebook seems to have made a Zucker out of Systrom:
When Systrom and Zuckerberg were working out terms for the deal, Systrom reportedly asked for $2 billion. But Zuckerberg got him to accept $300 million in cash and just under 23 million shares, telling his 20-something counterpart to look at the deal as a percentage of Facebook's total value. That way, according to a Wall Street Journal report, Systrom would eventually get his number -- assuming Facebook would someday be worth $2 billion.
just like Pritzker suckered Van Gorkom, Zuckerberg seems to have (perhaps unintentionaly) pulled a fast one on Systrom.
The lower Facebook stock drops, the more likely a lawsuit becomes and the higher the potential damages. If the question becomes, "did Instagram's board have an informed basis for believing Facebook stock was worth at least $30 per share," hindsight increasingly suggests a negative answer to that question. Of course, hindsight isn't supposed to come into play in these cases, but still ....
