Facebook IPO: What Instagram Deal Tells Investors

Mark Zuckerberg
Getty Images
Mark Zuckerberg

Mark Zuckerberg has done a great service to would-be investors in Facebook.

When he decided that he wanted Facebook to buy Instagram, he personally negotiated the deal with Instagram's founder. According to The Wall Street Journal, he did not bother consulting the board of directors of Facebook before he reached a deal with Instagram. He didn't consult with Facebook's lawyers, investment bankers or accountants.

He just hammered out a deal to spend $1 billion of Facebook's money on Instagram.

This hasn't put him in hot water with the board, the way Stan O'Neal's secret M&A negotiations put him in hot water. And that's because Facebook is and will remain totally dominated by Zuckerberg.

This is an extremely valuable lesson for investors considering buying shares of Facebook when the company goes public. If you are buying shares in Facebook you aren't buying a share of control in the company. You and your fellow outside shareholders won't really have a say in the way the company is run at all, apart from some very meager legal rights. You are just buying a stake in Mark Zuckerberg's enterprise.

As I wrote in February:

All told, that gives Zuckerberg 56.9 percent of the votes on Facebook’s board. Which means, effectively, that he has 100 percent control over the company. The public will have no say in the governance of the company.

Facebook’s initial public offering registration statement makes Zuckerberg’s domination very clear. It spells out that because the company is considered a “controlled company” under securities laws, it doesn’t need to have a compensation committee evaluating the pay of management or independent directors on its board

This was all mostly theoretical until the Instagram purchase. Now we've seen the very real and practical consequences of Zuckerberg's control. He can spend a billion dollars on a whim. On a company with no revenue. Without asking permission from anyone.

That doesn't make Facebook a bad investment. But it does make Facebook a company in which outside investors will have very little influence.

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