Facebook passed a final hurdle Wednesday in its effort to buy Instagram, after the CEO of the popular photo-sharing service testified in favor of a deal that's worth about $260 million less than when it was announced last spring.
At the end of a brief hearing, California's Corporations Department gave its blessing to Facebook's plan to issue 23,000 shares of stock for the acquisition.
The Instagram deal raised eyebrows when it was announced in April because it placed a $1 billion value on the 2-year-old San Francisco startup, which had no revenue and just a handful of employees. Since then, Facebook's stock price has fallen sharply, but the deal is still worth more than $740 million to Instagram's investors, including co-founder and CEO Kevin Systrom.
Systrom and a Facebook representative testified Wednesday that they negotiated the deal for a combination of $300 million in cash and a fixed number of Facebook shares because that would give both sides a stake in the combined companies' future.
"I've been taught in life to realize that there's upside and downside in all public markets," Systrom testified at the hearing. He added, "We still believe firmly in the long-term value of Facebook."
Systrom also testified that the deal arose out of conversations with Facebook CEO Mark Zuckerberg, whom he'd known
for several years. While others had shown interest in his company, Systrom said there were no formal offers other than Facebook's and "that was never the track we wanted to go down before."
Instagram had focused on increasing its user base, rather than making money, Systrom said, adding that he felt the Facebook deal would let his company build on the Menlo Park social network's "infrastructure and expertise."
At the same time, he said, Facebook's offer, which came shortly after Instagram had internally determined its own value at $500 million, seemed like "a great opportunity" for Instagram's investors.
The deal was negotiated quickly over last Easter weekend, officials said. Facebook executive Amin Zoufonoun testified that his company had been working to develop its own photo-sharing service, but he said Instagram had come up with an application that is "magic" and "resonates with users," including top Facebook executives.
The Federal Trade Commission has already cleared the Instagram deal after finding it does not pose antitrust issues. Facebook opted to seek the state's approval for the stock issue, rather than go through a more cumbersome process with the Securities and Exchange Commission.
