All the conventions of typical mergers or acquisitions—in reference to time, transparency, the consideration process—were thrown out the window when Facebook undertook its three-day negotiation with the photo-sharing service Instagram. According to reports, the deal was sealed between Facebook CEO Mark Zuckerberg and Instagram CEO Kevin Systrom at Zuckerberg’s private home in Palo Alto directly—leaving Facebook’s board out of the picture until the final details were being decided. Not long after, the rest of the world was informed.
While Facebook may be one of the 21st century’s business success stories, should it really set the example when taking on such controversial deal execution? LeadingCompany reviewed pros and cons:
Pro #1: The deal was completed rapidly—while it’s too soon to say whether or not the purchase will help Facebook in competition with other mobile device services, it’s clearly a benefit that it was negotiated quickly, and Zuckerberg did so competently. The world of technology moves extremely fast: Instagram has attracted 30 million users in its 18 months of existence. For companies experiencing exponential growth, a long-term deal can become complicated over time. Facebook is in the process of planning its IPO, and likely cannot spend much time focusing on just one aspect of its business. The deal being completed in three days is evidence that, though the social network is evolving into a traditional business, it remains bureaucracy-free.
Pro #2: Personal approaches show seriousness—business is also about relationships, especially in the case of tech industry, where founders’ presences are strong even over time. Zuckerberg was reportedly concerned that Systrom might get a bad feeling if he approached them via lawyers. He had already turned down a Facebook deal a year earlier, preferring to stay separate. Zuckerberg apparently was willing to spend the time to ensure the deal worked.
Pro #3: Negotiating at his home gave Zuckerberg the advantage—part of his personal approach entailed inviting Systrom into his home, rather than Facebook offices. While it may have seemed like mere courtesy, it was also a clever psychological play. Research proves that when people negotiate in spaces they “own” (including their office) they can claim as much as 160% more value in distributive negotiation. And this deal is another case-in-point, with Zuckerberg being able to negotiate Systrom’s asking price down by 50%, from $2 billion to $1 billion. By keeping it personal, he caught the attention of Systrom, and ultimately got what he wanted.
However, there were also some cons:
Con #1: Boards protect minority shareholders—most shareholders would have been horrified they knew the CEO of a company in which they owned shares negotiated a substantial deal with no input from the board, and rightfully so. Facebook is a private company for now, but won’t be very soon.
A board is the last line of defense for minority shareholders, according to Ralph A. Walkling, the executive director of the Centre for Corporate Governance at Drexel University, as he explained to the Wall Street Journal. Company leaders ought to be cautious with others’ money, even if they own a large part of the company.
According to the ASX’s corporate governance guidelines, the key responsibilities of the boards of listed companies include monitoring the progress of mergers and acquisitions, and so, justifiably, Facebook’s board should be unhappy about Zuckerberg’s deal.
Con #2: A few heads are better than one—company boards should provide their company with guidance, and members should be trusted due to their discretion and experience. While Zuckerberg may be in charge, his board would have likely contributed their own ideas about the acquisition. Without them, he probably missed out on some valuable input.
Con #3: Corporate takeovers is a risky business, and so using lawyer’s is a smart move – and avoiding them could have been a dangerous maneuver. Takeovers can potentially expose a company to all sorts of unexpected costs and liabilities if it doesn’t investigate their interests prior. Zuckerberg charged Amin Zoufonoun, Facebook’s director of coroproate development, with helping the CEOs hammer out details once negotiations were well underway. Zoufonoun is an experienced corporate lawyer, but even so could not have alone carried out the detailed work of a top-tier law firm over the short period of time he was given.
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