Is Facebook inflating the social media bubble?

Facebook’s acquisition of photo-sharing social media network, Instagram for as much as R7.9 billion, has led to speculation that social media is heading into new ‘bubble’ territory.

Not so, suggests World Wide Worx’s MD, Arthur Goldstuck, who believes that Facebook’s purchase is a defensive move ahead of its imminent IPO.

“The Instagram purchase is more a factor of its stratospheric growth at a time when Facebook is prpeparing for a listing, than of a bubble as such,” said Goldstuck.

“It is a case of Facebook defending its position as the world’s leading photo-sharing environment, and of making an obvious acquisition of the fastest growing player in this arena, rather than of Instagram in its own right suddenly having this high value.”

Instagram, prior to being bought up by Facebook, was valued around $500 million (R4 billion) – a valuation achieved after only 2 years. The photo sharing application was developed for a relatively small $500 000 (R4 million) in 2010.

The Facebook offer price is reported to have netted Instagram CEO, Kevin Systrom – with a 40% stake in the company – around $400 million (R3.1 billion), or 80% of the company’s reported value.

“Time is tight for Facebook, prior to its IPO, and they obviously made an offer that couldn’t be refused, taking advantage of the current high value of Facebook shares.”

The indicator

To feel out the case of a tech acquisitions bubble, one needs only look at the once-‘darling’ Groupon, which was approached with similar take-over offers at its peak.

Groupon is a deal-of-the-day website that offers discount ‘coupons’ and gift certificates from localised companies. It was started in 2008 with a $1 million (R7.9 million) capital backing, shooting to a reported value of $1.35 billion (R10.6 billion) in 2010.

“Groupon’s biggest mistake may well have been not accepting a similar offer-that-couldn’t-be-refused from Google and believing its own hype about how much it was worth,” said Goldstuck.

Before listing with its own IPO, Groupon was a hot property online, reportedly being approached by Yahoo! with an acquisition offer of $3 billion (R23.7 billion), and also by Google, in an offer for $6 billion (R47.4 billion) – both of which were rejected by the company.

“Although it has a market cap of above $8 billion (R63.3 billion), versus that $6 billionĀ (R47.4 billion) offer, it is unlikely they will be able to extract that value from the business.”

“The market has already punished Groupon, and its share price is down to a low of $13 (R102) from a high of $31 (R245). That looks like fairly sane market response to a business that had previously been over-hyped.”

“If we were in the midst of a bubble for group buying sites, that share price would be closer to its highs,” Goldstuck concluded.

The bubble burst

Social media companies have a history of riding the rise of bubble trends – being rated at extremely high values and subsequrntly meeting a sharp decline when that bubble bursts.

The fickle nature of these bubble trends can be seen with companies like MySpace which, in its prime, was valued at $12 billion (R95 billion) when Rupert Murdoch’s News Corp had attempted to merge the social network with Yahoo! in 2007.

However, once the bubble burst, and Facebook took the lead as the social network of choice, MySpace hit a sharp decline in revenue and memberships – until News Corp sold the company to Specific Media for a reported $35 million (R277 million) in 2011.

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Is Facebook inflating the social media bubble?