Due diligence.
It’s a term, when applied to a merger or acquisition, that refers to time, transparency, and careful consideration of the deal, often involving many parties. Each party in the deal and their advisers look at the deal from in their own area of expertise and interest.
Facebook threw those conventions out the window with its three-day marathon of a negotiation for photo-sharing service Instagram. According to reports, the deal was sealed largely through direct negotiation between Facebook CEO Mark Zuckerberg and Instagram CEO Kevin Systrom at Zuckerberg’s Palo Alto home. Facebook’s board heard nothing about it until the final details were being hammered out. Shortly after the board was informed, the rest of the world was.
Facebook is one of the 21st century’s business success stories, but should leaders be taking pointers from its controversial deal execution? LeadingCompany examined the pros and cons.
While it’s too soon to tell whether the Instagram purchase will help Facebook gain a lead in the lucrative mobile devices space, there are clear positives in how the deal was negotiated. It was quick, and Zuckerberg displayed deftness in the negations.
The world of technology moves fast. Very fast. Instagram is only 18 months old yet can boast 30 million users. For a company facing such exponential growth, a drawn-out deal can be complicated as its position constantly changes. Facebook itself is planning its IPO, and presumably can’t afford to spend lots of time focusing on what is just one aspect of its business. Done as it was, the acquisition of Instagram took only three days – showing that despite the social network’s moves into the world of traditional business, it remains blissfully bureaucracy-free.
Business,, like so many things, is about relationships. This is especially the case in the tech industry, where founders loom large and often control substantial voting rights. Reports suggest Zuckerberg was concerned Systrom might have reacted negatively if he was approached by lawyers. He’d already turned down a deal from Facebook a year earlier, preferring to be his own man. By making the approach personal, Zuckerberg showed he cared about the deal, and was willing to devote his time to making sure it worked.
Part of this personal approach was Zuckerberg inviting Systrom not to the Facebook offices, but to his home. This might seem like a friendly courtesy, but it might have also been a clever play on human psychology. Research shows when people hold negotiations in space they ‘own’, like their office, they are able to claim as much as 160% more value in distributive negotiation. And indeed, Zuckerberg was able to halve the asking price Systrom wanted, from $2 billion down to $1 billion.
By making it personal, Zuckerberg both made sure Systrom would listen, and boosted his chances of getting what he wanted.
But then there are the cons…
Many shareholders would be rightfully horrified if the CEO of the company they owned went off and negotiated a substantial deal all on their own with no input from the board. While Facebook is a private company, it won’t be for much longer.
As Ralph A. Walkling, executive director of the Centre for Corporate Governance at Drexel University told the Wall Street Journal, a board is the last line of defence for minority shareholders. Company leaders, even if they do own a large part of the company, would do well to be cautious when dealing with other people’s money.
According to the ASX’s corporate governance guidelines, approving and monitoring the progress of mergers and acquisitions is one of the key responsibilities of the boards of listed companies. Under this understanding, Facebook’s board should be unhappy about what happened.
Company boards are there to provide guidance and direction to a company, and board members should be trusted both for their discretion and their experience. While Zuckerberg may be running the show, it’s likely his board would have had ideas to contribute regarding the acquisition. By doing it all on his own, he may have missed out on some valuable advice.
Avoiding the lawyers may have been another bad move. Corporate takeovers are risky and can expose a company to all sorts of unexpected costs and legal liabilities if it doesn’t carefully investigate its target. When the talks were well under way, Zuckerberg got Amin Zoufonoun, Facebook’s director of corporate development, to help the two CEOs hammer out the details. Zoufonoun does have experience as a corporate lawyer, but couldn’t have single-handedly carried out the detailed work you would expect from a top-tier law firm over several days or weeks.
This article first appeared on Leading Company.
Myriam Robin is a media reporter at Crikey. She’s an economics graduate who previously reported on business for LeadingCompany and SmartCompany.
