Facebook's Acquisition of Instagram

This assignment examines Facebook's acquisition of Instagram for $1 billion in 2012. It analyzes the rationale behind the acquisition, considering factors like future growth prospects, risk assessment, and the price-earnings ratio. The paper also discusses the impact of inflation, interest rates, and tax policies on the deal's financial viability. Furthermore, it touches upon the criticism surrounding the acquisition and Facebook's perspective on Instagram's value.

Running head: FINANCE
Finance
University Name
Student Name
Authors’ Note

2
FINANCE
Five Year anniversary of Face book’s acquisition of Instagram
Changes in policy
Facebook essentially bought nearly 35 million users of Instagram for approximately $1
billion that is equal to over $28 for every user. Analysis of the acquisition reveals the fact that
during the time of acquisition, the valuation of facebook stood at $90 billion. However, the
present valuation of facebook stands at $306.4 billion that is roughly $179 per share.
Essentially, in this case, valuation is necessarily the price that a specific party pays for
another party, or in other words it is the value that a specific side will sacrifice in order to
make the transaction work (Fracassi, 2016). As such, valuation can be considered as a
combination of flow of cash as well as the time value of money. In this case, the seller firm
tends to value the corporation at a price as high as possible, whilst the purchaser tends to get
the lowest price possible.
Amidst several criticisms as regards the acquisitions of Instagram, facebook had different
ideas regarding the worth of the company. Many questioned the decision of acquiring
Instagram as many people were of the view that disbursing $1 billion for a corporation that
generated no revenue was not feasible. Basically, management of the firm facebook
considered the future prospects of business, solid growth base, risk of the target firm and cost
of capital. In a bid to understand whether a specific deal is worthwhile it is important for the
acquiring firm to comprehend the price-earnings ratio as P/E for all stocks falling within the
identical industry can provide acquiring firm proper guidance regarding multiple of target P/E
(Grinblatt & Titman, 2016). Again, the acquiring firm also need to consider enterprise value
to sales value ratio as this can help in understanding the value as well as amount of debt of a
corporation that necessarily needs to be returned back at certain point of time. The company

3
FINANCE
facebook registered increase in research as well as development expenditure from $1.4 billion
in 2012, $388 million in 2011 and $144 million in 2010.
At the time of acquirement of Instagram that is during the year, the rate of inflation in USA
was registered to be 2.07%. The inflation rate presents an overview of the American inflation
that is based on the consumer price index (Bena & Li, 2014). However, analysis of annual
report of facebook reveals that inflation has had a material effect on the overall business,
financial condition as well as outcomes of operations. However, inflation affects the capital
market and hinders corporate growth and thereby adversely affects Merger & Acquisition.
Interest Rate enhances the cost of funding an acquisition. As the rate of interest augments,
acquisition cost increases and this increased cost essentially discourages diverse acquirers
from purchasing. Again at the time when Treasury rate is high, discount can be considered to
be high as an acquirer can securely park money in different risk free investment with high
level of interest (Greve & Zhang, 2017). Finally, all the valuations is said to decrease in case
if the rate of interest is enhanced. Annual report of facebook for the period 2012 shows that
the effective tax rate was 89% up from 41% from 2011. In addition to this, with increase in
tax, owners of firms are less probable to cash out owing to increased tax consequences from
the firm’s sales.

4
FINANCE
References
Bena, J., & Li, K. (2014). Corporate innovations and mergers and acquisitions. The Journal
of Finance, 69(5), 1923-1960.
Fracassi, C. (2016). Corporate finance policies and social networks. Management Science.
Greve, H. R., & Zhang, C. M. (2017). Institutional logics and power sources: Merger and
acquisition decisions. Academy of Management Journal, 60(2), 671-694.
Grinblatt, M., & Titman, S. (2016). Financial markets & corporate strategy.