Has the world gone mad?


Over Easter Facebook announced that they were acquiring Instagram for $1bn.

I’m prepared to bet here and now that 50% of people reading this blog have never heard of Instagram. Insta what?

It’s an app for your iPhone. You take a photo and Instagram makes it look cool and trendy (that is, sepia tinted mostly). Huh, you think, aren’t there loads of apps that do that? Yes there are.

Anyway, Instagram makes no money, but was still valued at $500m when it raised some cash a couple of weeks before Easter. Then it launched an Android version of the app, Facebook struck and fresh-faced CEO Kevin Systrom was walking home with $400m in his pocket.

Now according to Forbes magazine, all this was a piece of smart business from Facebook. They bought a rival company for $33 a user (Instagram has 30m users) largely using their own shares – which currently value a Facebook user at $117, or roughly four times an Instagram user.

Hang on. A billion bucks for a company that makes no money? That was valued at half that amount only a couple of weeks previously?

Has the world gone mad?

Does this signal the end of the technology bubble in the way that the flotation of lastminute.com signalled the end of the dotcom bubble in the UK?

I don’t know.

What I do know is that 245 miles from Facebook HQ in Palo Alto is the Carrizo Plain, shortly to be the home of one of America’s largest solar energy plants. This plant will generate enough electricity to supply 160,000 American homes and the company building the plant is currently in the process of signing 25 year agreements with the Pacific Gas and Electric Company.

It’s a $2bn investment by that know-nothing ne’er-do-well, Warren Buffet.

So which would you rather do? Buy a cool app that lets you take photos but doesn’t make any money? Or a plant that will generate a depressingly predictable income stream for as long as the sun shines?

And what does it all mean for the value of your company? After all, you’re presumably planning to sell your business at some stage in the future and live happily ever after with your pot of gold?

Whether you’re in Palo Alto or Pocklington; Silicon Valley or Sherburn-in-Elmet, I think there are three key lessons we can all learn from Facebook’s acquisition:

1. Timing is everything. Five years ago, the word Blackberry was more or less synonymous with smartphones. The idea that an upstart computer manufacturer could capture the market was, frankly, ludicrous. Today, Forbes describes Blackberry manufacturer RIM as “a financial basket case” with its share price plunging by 75%. Five years from now Instagram could well have gone the same way. But this weekend it was worth $1bn and the shareholders have cashed in accordingly. Your business – and mine – is no different: the value of it will rise and fall. Timing your exit will be crucial.

2. For the great majority of us, though, the fundamentals will always matter. North Yorkshire is a long way from Silicon Valley and you’re unlikely to sell your business on a sky-high multiple of what it might earn ten years from now. So while cash-flow and net profits might be hopelessly outdated concepts in some parts of the US, they are – and always will be – the bedrock of your business and, ultimately, what you’re going to sell.

3. But a little bit of sexy is good. The internet, social media and the Instagrams of this world are not going to go away – so if you’re selling up, think about sprinkling a little bit of that online stardust over the basics of the business. Everyone buying a business is to some extent buying potential: make sure that you provide some. In old-fashioned adspeak, sell the sizzle as well as the steak.

Let me finish by depressing the Facebook fans amongst you. Back in 2008 AOL bought teen social network Bebo for $850m: two years later they sold it to a private equity firm for $10m. Newscorp bought Myspace for $580m in 2005 when Facebook was still in Master Zuckerberg’s bedroom. They later sold it for a huge loss. The acquisition of Instagram may yet prove to be a very shrewd piece of business: then again, if a guy with an American accent and a cheque for $1bn wanders into your office this week, I know what I’d do…

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4 comments

  1. ksrobbins · April 13, 2012

    Not as made as you’d think, they’ve bought a data base of 24 million users details that’s also got user, location, habits, demographic and shopping behaviour all spread nicely across the world, I would guess that the integrated databases drive a competitive advantage for the future plans of Facebook and helps give them that elusive Strategic advantage that we are always looking for. 

  2. Chris Wilson · April 13, 2012

    Let’s not forget “Friends Reunited”. Bought by ITV for £175 Million and then sold for £25 Million.

  3. Rob Blake · April 13, 2012

    It is an interesting one. Is it overvalued? Possibly, but I think a key answer to the price is within your post: timing.

    Timing in two senses. One: Facebook has the cash to make strategic acquisitions, I would assume funded by reserves, a whopping share price and income from its IPO. Two: Facebook has recognised now is the time to take down the competition, something that the long list of failures (MySpace etc.) mentioned by yourself and others did not do. If you could spend 1% of your market cap to take down your fastest growing competitor, would you do it? I suspect most people would.

    Will it work in the long run? I honestly don’t know. All I can say is that social media is Facebook’s core competency, so if anyone can make it work I would expect it to be them. Can we honestly say that about Newscorp, AOL or ITV?

    Is there a tech bubble? I’m not convinced just yet. True, Groupon’s IPO seems to have been troublesome, particularly given their recent earnings restatement. However there aren’t that many other big tech IPOs on the horizon.

    Interesting stuff.

  4. Rory Ryan · April 13, 2012

    When we did economics back in school the idea of buying something of a recognised value and selling it to make a profit seemed like sense. My money would go on the solar!

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