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How Instagram Could Have Cut a Better Deal

Mike Krieger, left, a co-founder of Instagram, and Shayne Sweeney, an engineer.

Peter DaSilva for The New York TimesMike Krieger, left, a co-founder of Instagram, and Shayne Sweeney, an engineer.

In hindsight, perhaps Instagram should have cut a different deal with Facebook.

In April, Facebook agreed to acquire Instagram, the hot social media photo-sharing site, in a deal valued at the time at about $1 billion.

The problem is that Facebook did not agree to pay $1 billion in cash. The deal terms said Instagram would receive $300 million in cash and about 23 million shares of Facebook stock once the deal closed. Facebook stock at the time of the deal was valued by the parties at about $30 a share.

e, Facebook’s initial public offering has taken place — and we all know what happened. Facebook shares have fallen substantially, and the Instagram acquisition is now valued at about $735 million. The Instagram founders are out almost $300 million, at least on paper.

Instagram’s founders could have avoided this situation by bargaining differently.

What is notable is that Instagram and Facebook did not agree to a floating share exchange ratio or a stock collar, two fairly common merger tools.

A floating share exchange ratio ensures that a seller will receive a fixed value in the acquisition regardless of what happens to the purchaser’s shares. As a result, the number of shares issued by the buyer will increase or decrease to match that fixed dollar amount.

This means that the seller does not take the risk of the buyer’s share price going down before the acquisition is completed. In exchange, the seller forgoes any upside increase.

In contrast, Instagram agreed to a fixed number of shares rather than a fixed dollar value. That meant Instagram’s owners took the risk of a decline in Facebook shares in exchange for all the benefits of an increase.

Either type of deal structure can be accompanied by a stock collar.

If the parties agree to a fixed number of shares, as with the Instagram deal, a collar could work like this: the number of shares to be issued is fixed within a range – or a collar. If the share price rises above or below the range, the number of shares adjusts to pay a minimum or maximum dollar amount to a seller. The range, or the collar, is typically set at about 5 to 10 percent around the share price value at the time.

As a result, if the seller’s stock price falls below this 5 to 10 percent range, more stock is issued to compensate the seller — and less if the stock goes up. Again, the goal is to protect the seller on the downside in exchange for giving up some of the benefits of the upside.

The type of exchange ratio and collar can take different forms than the above, generally with the net goal of giving the sellers downside protection.

There are also other protections that Instagram could have asked for to brace itself against a Facebook stock decline, like the right to terminate the deal if Facebook’s stock price declined substantially. But no combination of these mechanisms was used in the Instagram deal.

We do not know why this is the case, but about 80 to 90 percent of stock deals use fixed exchange ratios, according to Factset Mergermetrics, and stock collars were only employed in about 11 percent of recent deals.

It may have been that the Instagram founders did not want to exchange a share of the upside for downside protection, preferring instead to make what is so far a losing bet on Facebook stock. It may also be that since the parties were both in the same industry, a fixed exchange ratio was thought more appropriate because the market would assign them equally in value, a common assumption underlying this choice.

But at the time of the deal, Facebook was pretty bullish on its stock prospects. Facebook probably would have acceded to some type of collar protection, possibly even without a collar on the upside.

This also appears to be a very hastily negotiated deal by some young executives, inexperienced in the world of mergers and acquisitions. The deal may already have been set by the time the lawyers and investment bankers came in, so that probably meant that a collar or floating share exchange ratio was already out of the question.

Instagram’s negotiations are looking particularly important in hindsight because of the delays to the completion of this transaction, delays it probably should have expected.

Facebook still needs antitrust clearance to complete the deal. It received antitrust clearance from British authorities last week, but is still awaiting approval from American regulators.

It appears the parties thought there might be some level of antitrust review and delay because Facebook agreed to pay Instagram $200 million if the deal was terminated as a result of a failure to receive such clearance. If so, this would be another indicator for Instagram to have bargained harder on how it was paid.

Recent reports have implied that Facebook is trying to speed up the close of the acquisition by using a California fairness hearing process.

A California fairness hearing is one of those quirky procedures under the securities laws. For a stock to be able to be traded freely in the public market, it must be registered with the Securities and Exchange Commission or qualify under an exemption. Facebook, for example, just went through the whole registration process to sell its stock in its I.P.O. The registration process can be arduous and take three to four months.

An alternative is to use the exemption under Section 3(a)(10) of the Securities Act, which allows shares to be freely sold without registration if they are qualified through a state fairness hearing. Six states have these procedures. California is the most prominent state providing for this by statute.

A fairness hearing is really an alternative to S.E.C. registration at the state level. The exemption is available under the presumption that the state determination of fairness is sufficient to replace S.E.C. review in a registration.

Supporting documentation is filed with the California Department of Corporations, and a fairness hearing is held at which the presiding officer makes a determination of fairness. The exemption is commonly used in Silicon Valley to sidestep registration. It is cheaper and faster, costing up to $2,500 plus a hearing fee and taking only one to two months.

When the Instagram deal was struck, the parties probably expected an antitrust delay, so using the fairness proceeding was more about saving money and having a less complex proceeding.

In any event, the hearing is scheduled for Aug. 29. It is open to the public, but as Brian Quinn at the M.&A. Law Prof blog has written, nothing much is likely to happen.

Fairness is determined by reference to whether arms’ length bargaining occurred, something that appeared to happen here. Even then you need objectors to state a case against fairness, something not likely to happen as Instagram at this point is probably happy with what they are receiving, given the rerating of social media going on after the soured Facebook I.P.O. And even if the fairness hearing did not result in approval, the acquisition agreement would probably just allow Facebook to register the shares with the S.E.C. as an alternative.

Ultimately, though, the antitrust delay is what has really hurt Instagram, and the timing of the fairness hearing is a nonevent that will not speed up this deal.

The end result is that delay has cost Instagram’s owners hundreds of millions, losses they could have avoided or reduced by negotiating differently. It is a lesson for those who strike deals in the heat of the moment — and perhaps too hastily.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

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RIP: ‘Top Gun’ Director Tony Scott Dead in Apparent Suicide:

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Tony Scott, director of Top Gun and brother of Prometheus director Ridley Scott, has died from what appears to be suicide after jumping from the Vincent Thomas bridge near Long Beach, California, around 12:30 p.m. on Sunday.

Update: ABC News is now reporting that Tony Scott had inoperable brain cancer. This has not been confirmed by the family and no further details of his condition have been forthcoming.


The Wrap has reported that the 68-year-old British-born director’s identity had been confirmed by Los Angeles County Coroner Lt. Joe Bell. The U.S. Coast Guard found a

suicide note

list of names and phone numbers in Scott’s vehicle, parked on the eastbound lane of the bridge. A suicide note was later found in his office. Scott climbed the apex at the south side of the bridge and jumped “without hesitation.” Details of the suicide note have not been released.


Tony Scott’s recent projects included Unstoppable with Denzel Washington and Prometheus, on which he was a producer. Scott also had many TV credits in his career, including The Good Wife.


Tony Scott is survived by his wife, Donna Scott, and two children. Our condolences go out to the Scott family. This is truly a tragedy and the entertainment world will be impacted by this great loss.

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Assange Makes First Public Appearance in Two Months

By ASSOCIATED PRESS | August 19, 2012

Wikileaks founder Julian Assange speaks to the media outside the Ecuador embassy in west London on August 19, 2012.

Wikileaks founder Julian Assange speaks to the media outside the Ecuador embassy in west London on August 19, 2012.

(LONDON) — WikiLeaks founder Julian Assange called on President Barack Obama to end a so-called “witch hunt” against his secret-spilling website, appearing in public Sunday for the first time since he took refuge two months ago inside Ecuador’s Embassy in London to avoid extradition to Sweden on sex crimes allegations.

The 41-year-old Australian, who has fought for two years against efforts to send him to Sweden for questioning over alleged sexual misconduct against two women, addressed several hundred supporters and reporters as he spoke from the small balcony of Ecuador’s mission, watched by dozens of British police.

Ecuador’s President Rafael Correa on Thursday granted Assange asylum and he remains out of reach of British authorities while he is inside the country’s embassy. Britain insists that if he steps outside, he will be detained and sent to Sweden, as by law it must meet the obligations of a European arrest warrant.

(PHOTOS: Inside WikiLeaks’ Bunker)

Assange and his supporters claim the Swedish case is merely the opening gambit in a Washington-orchestrated plot to make him stand trial in the U.S. over his work with WikiLeaks — something disputed by both Swedish authorities and the women involved.

“I ask President Obama to do the right thing. The United States must renounce its witch hunt against WikiLeaks,” Assange said as he read aloud a written statement. “The United States must dissolve its FBI investigation. The United States must vow that it will not seek to prosecute our staff or our supporters.”

He said that in purportedly targeting WikLeaks, the U.S. risked “dragging us all into a dark, repressive world in which journalists live under fear of prosecution.”

The White House declined comment Sunday.

A Virginia grand jury is studying evidence that might link Assange to Pfc. Bradley Manning, the U.S. soldier who has been charged with aiding the enemy by passing the secret files to WikiLeaks and is awaiting trial. No action against Assange has yet been taken.

Assange also urged the U.S. to release Manning, but said: “If Bradley Manning really did as he is accused, he is a hero, an example to us all, and one of the world’s foremost political prisoners.”

The WikiLeaks founder did not refer in his statement to the Swedish allegations against him, or indicate how he believes the stalemate over his future may be resolved, though he said he hoped to be “reunited soon” with his two children.

(MORE: How Ecuador Used Assange to School the Brits)

“I think these allegations are just a way of getting to him,” said Laura Mattson, a 29-year-old supporter from London who joined a raucous crowd outside the embassy. “Is it about the charges or is it about silencing WikiLeaks?”

Assange said Ecuador had shown itself to be “courageous” in granting him refuge, and claimed to have won support from other Latin American, Central American and South American nations — including Brazil, Chile, Mexico and Argentina.

Speaking outside the embassy, former Spanish Judge Baltasar Garzon, who is representing Assange, said Ecuador could consider making an appeal to the International Court of Justice in the Hague to compel Britain to grant Assange safe passage out of the country.

Garzon, who won global fame for aggressively taking on international human rights cases, is appealing his conviction for overstepping his jurisdiction in a domestic corruption probe in Spain.

Tensions have risen between London and Quito over the Assange case, after Britain appeared to suggest it could invoke a little-known law to strip Ecuador’s Embassy of diplomatic privileges — meaning police would be free to move in and detain Assange.

Assange claimed Britain had only refrained from carrying out the threat because of the presence of his supporters outside the embassy. Ecuador’s mission is a small apartment inside a larger building which houses offices and Colombia’s Embassy. British police form a thick line outside, and are on guard in the building’s shared lobby and staircases.

(MORE: Assange’s Special Asylum: Why Ecuador Isn’t Nice to Anyone Else)

“Inside this embassy in the dark, I could hear teams of police swarming up inside the building through its internal fire escape,” Assange said. “If the U.K. did not throw away the Vienna Convention the other night, it is because the world was watching.” Under the 1961 Vienna Convention on Consular Relations, diplomatic posts are treated as the territory of the foreign nation.

Britain’s government declined to comment on Assange’s statement, though diplomats have accused Ecuador of deliberately misinterpreting its attempts to explain its legal options, and insist they are seeking an amicable solution to the standoff.

The WikiLeaks founder attempted to draw parallels between himself and the Russian punk band Pussy Riot, three of whose members were convicted and jailed this week for a performance denouncing President Vladimir Putin in a Moscow cathedral.

“There is unity in the oppression. There must be absolute unity and determination in the response,” Assange said.

He shot to international prominence in 2010 when his WikiLeaks website began publishing a huge trove of American diplomatic and military secrets — including 250,000 U.S. embassy cables that highlight the sensitive, candid and often embarrassing backroom dealings of U.S. diplomats.

As he toured the globe to highlight the disclosures, two women accused him of sex offenses during a trip to Sweden. Assange denies any wrongdoing, and insists sex with the women was consensual.

MORE: Out of Ecuador: Another U.S. Ambassador Bites the WikiDust


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Pension planning for retirement



A tribal man takes part in a protest against land acquisition in Mumbai July 25, 2011. REUTERS/Danish Siddiqui/Files

A tribal man takes part in a protest against land acquisition in Mumbai July 25, 2011.

Credit: Reuters/Danish Siddiqui/Files

By BankBazaar

Sat Aug 11, 2012 9:38am IST

According to a survey in United Kingdom, more than 50% of people do not save enough for their retirement. The number is worse for Americans and Canadians. 150 million Americans out of 200 million, who are in working age, are not saving enough to fund their needs after retirement. Similarly, 80% of Canadians will not have a comfortable life after retirement. Countries like America, UK, and Canada offer many benefits for old age people in terms of social security. However, this amount is small and doesn’t guarantee a good life.

The situation in India is worse because there is absolutely no social security for a large mass of people. With increasing prices and longevity, the need for sufficient corpus is of paramount importance. In this article, we will take a look at some of the pension schemes available in Indian market and how can we make the most out of them.

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A pension plan is a scheme where people invest in order to withdraw a specified sum of money periodically after they retire. They can also withdraw in lump sum amount but this is not advisable. People invest in many instruments for their future requirements. These instruments differ in returns and structure of products.

Employee provident fund (EPF) –

EPF is a scheme which allows employees to contribute certain part of their income for their provident fund. The advantage of this scheme is that the employer contributes equal amount. EPF is the most widely used pension plan. This gives 8.6% returns on the savings. Investors should keep an eye on EPF rate as it keeps changing. At the same time, the interest earned on it is not taxable. Nowadays, individuals also get annual statement from their company which helps them plan better for post-retirement needs.

Public Provident Fund (PPF) –

PPF is another pension scheme, which allows individuals to save a certain amount. The return is 8.8% and the tenure is 15 years. Please keep an eye on the rate as it keeps changing. Due to the flexibility that PPF offers, it has become a very popular instrument for employees to plan for their retirement. Individuals can save Rs 500 to Rs 1,00,000 every year. It is offered by many banks and post offices. Since the interest rate is known, individuals know how much they are going to receive at the end of the tenure. If individuals want to extend the tenure, they can do it in a slab of 5 years.

There are other savings scheme by Government and banks that are also used by individuals for their retirement plan.

Pension funds –

Pension funds are mutual funds offered by fund companies. These funds are mainly of three types – aggressive funds, balanced funds, and conservative funds. Aggressive funds invest major part of their fund in equity. Balanced funds invest a part of fund in equity while conservative funds invest almost all in debt securities. Needless to say, Equity funds are the most risky of them. Balanced funds are risky compared to conservative funds because of equity exposure. However, looking at the time horizon of individuals, equity funds and balanced funds can give better returns over long term. Conservative funds are less risky and hence give low returns. In general, equity funds can give 12% to 18%; balanced funds can give 10% to 15%; while conservative funds can provide 7% to 10% returns over long term.

Few pension funds launched by mutual fund companies are the following. The list below is merely indicative and is just an illustration for the sake of providing examples. Fund name Fund company Type of Fund Structure Returns since inception UTI – Retirement Benefit Pension Fund UTI Hybrid fund, debt oriented 40% Equity, 60% debt and liquid 11.01% Tata Retirement Savings Fund – Moderate Plan Tata Mutual Fund Equity Oriented Hybrid Speciality Funds 85% Equity, 15% debt and liquid 9.15% Templeton India Pension Plan (G) Franklin Templeton Equity Oriented Hybrid Speciality Funds 35% Equity, 75% debt and liquid 12.71%

There are other mutual funds which offer the same. The funds mentioned here also offer different variants. The variants can be aggressive plan or conservative plan depending on exposure to equity. The variants can also be dividend or growth depending on payment structure of the fund.

Unit Linked Pension Plan –

There are pension plans which are linked to the market. These plans expose investors to higher risk but the return will also be high in longer term. However, investors must be careful in choosing the unit linked pension plan. You may not want to take too much of risk while planning for your retirement. Some of the unit linked pension plans are HDFC unit linked pension plan, Kotak retirement income, ICICI pru lifetime pension maxima, and many others. Investors should do more research on past performance to select the right one.

Important points

The pension funds, while offering a great way to plan your retirement, also penalize you hard if you redeem it before time. Most of the funds do not charge you anything if you redeem after 5 years. However, they may charge as high as 3% to 5% if you redeem within 3 years.

There are other opinions on retirement planning such as buying good, performing mutual funds and take term insurance at the same time. This can also be a very effective tool for retirement planning but investors need little more knowledge to form an effective portfolio.

Finally, investors must separate insurance and investment for retirement. There are many products which combine these two. The best way to judge whether you should go for such products is to know their past returns. An insurance product will have low returns which will not be right for an investment product.

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