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:

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Technology Valuation: US GAAP View

It is hard to underestimate the importance of technology in modern enterprises.  From legacy manufacturing to artificial intelligence and life science breakthroughs, technology plays an ever-increasing role.  However, the need to assign a specific value to it may arise only when the enterprise is faced with a strategic transition, such as a merger or an acquisition.

Your Valuation Needs Income Approach

The value of any business is defined by the amount of future cash flows it can generate.  The three basic valuation methods are the income approach, the market approach, and the cost approach.   Only the income approach directly addresses the question of value.  It is the first on the list of recommended methods in all guideline literature.  In fact, the

Intellectual Property, Goodwill, and Other Intangible Assets

The predominant amount of S&P 500 value comes from intangible assets and goodwill (“Intangibles”) of the underlying companies. It is no surprise that patents and brands are more valuable than desks. Understanding the components of intangible value is of great relevance to tax authorities and financial stakeholders.

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