Contrary to most reports, Facebook did not pay $1 Billion for Instagram. In fact, the acquisition was completed for $521 million, according to the company’s SEC filing. That document tells us that Instagram’s mostly intangible value was partly comprised of acquired technology and their trade name. $433 million of goodwill in the purchase price was explained as expected synergies from future growth and potential monetization opportunities.
Goodwill represents the part of purchase consideration that remains after all tangible and identified intangible assets are accounted for at fair value. In a 2012 study by Houlihan Lokey, the median amount of goodwill as a percent of purchase consideration was 64% in Media, Sports & Entertainment, 49% in Technology, and 42% in the Healthcare industries. Sorbus Advisors’ own study of the largest Application Software acquisitions revealed median goodwill of 59%.
Acquisitions of social media companies are extremely attractive. They provide instant access to and monetization opportunities of established communities of loyal users. Companies are willing to pay large premiums to sustain their own user base, to catch up with ever-changing monetization models, and to stay ahead of or defend against new competitors. While enormously important for future success and profits, under purchase accounting rules, none of these strategic value drivers are recognized as an intangible asset separately; they all end up in goodwill.
Take a look at these social media acquisitions: