Five Year Anniversary of Face book’s Acquisition of Instagram

Question: Discuss about the Five Year Anniversary of Face books Acquisition of Instagram. Answer: 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 ti me. The company 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 firms sales. 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.