Facebook Inc. (NASDAQ:FB) received the blessing from the Federal Trade Commission (FTC) on its April deal to buy Instagram, but there was one little snag – shares of stock. Facebook is looking to get approval from the state of California this week to offer 23,000 shares for sale to help close the deal, which was worth $1 billion but is now worth much less thanks to the underperformance of Facebook stock since its IPO in May.
Facebook Inc. (NASDAQ:FB) is asking the California Department of Corporations to rule this week on a “fairness hearing” that will give approval for the selling of 23,000 shares of stock to consummate the deal for Instagram. When the deal was announced just before the IPO, the $1 billion price tag included $300 million in cash and the 23,000 shares of stock, which at the time was worth about $700 million. Now, that stock is worth about half that much, which lowers the final purchase price by a third. The original price raised some eyebrows because Facebook Inc. (NASDAQ:FB) CEO Mark Zuckerberg paid that much money for a company that at the time had only nine employees and virtually no revenue.
Rather than go through a longer regulatory process with the SEC, Facebook Inc. (NASDAQ:FB) has opted to use the state law that allows corporations to issue shares without requiring SEC approval. According to experts in this area, the Department of Corporations hearing Wednesday in San Francisco will likely focus on whether Instagram executives now agree to the deal as it is structured.
“Is it fair to (Instagram) shareholders that their revenueless company now gets only $350 million of stock, or some rough equivalent, and $300 million in cash now that Facebook’s shares have declined in value? Sure it is,” wrote Brian Quinn, professor of law at Boston College, in his blog. “In hindsight, taking more of that in cash would have worked out better, but the Instagram board made a reasonable bet.”
The hearing is not expected to be controversial.