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Was Instagram worth $1 Billion to Facebook?

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:

More Updates

Shadow Preferred Stock Devalues Convertible Note

Convertible notes are starting to resemble CDOs, collateralized debt obligations that led to the 2008 financial crisis, partly because few understood how they worked. From the economic perspective, convertible notes are complex; that includes Simple  Agreements for Future Equity (SAFEs). In fact, they are referred to as “complex financial instruments” by auditors and financial regulators.  A typical convertible note is

What M&A Purchase Consideration Is Actually Worth?

Most M&A pricing efforts are focused on valuing an acquired business. Essentially no consideration is given to the value of assets an acquirer is giving up in a transaction. We will attempt to clarify some of these issues.

Covid-19 | Valuation Update | Three Months In

Just over three months ago, financial markets started responding to the news of a new pandemic. Within the following four weeks S&P 500 fluctuated between 3,373 and 2,237, effectively losing a third of its value. One of the most significant financial valuation melt-downs was on its way.

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