Facebook cleared by California to issue stock in Instagram deal

Facebook was cleared by the state of California to issue stock for its purchase of Instagram.

State officials declared the transaction was “fair, just and equitable” at the conclusion of a hearing in San Francisco before the Department of Corporations. The decision was expected.

The hearing was unusual but not for California. California is one of six states that lets companies seek permission to issue stock rather than dealing with the Securities and Exchange Commission.

Facebook agreed to buy popular mobile photo-sharing app Instagram in April for $300 million in cash and nearly 23 million Facebook shares. The shares were valued at $31, making the purchase worth at the time a cool $1 billion.

The transaction is no longer worth as much after Facebook’s bungled initial public stock offering in May. The social networking giant priced its shares at $38. Since then the shares have dropped below $20.

But Instagram founder and Chief Executive Kevin Systrom said in the hearing that he understood the ups and downs of the public markets and that the transaction is now worth more like $750 million.

He said the billion-dollar valuation “was something generated from the press” while he and others at Instagram just simply negotiated a deal for stock and cash.

“We still believe firmly in the long-term value of Facebook,” he said.

The deal drew huge headlines because the company was so young (launched in late 2010), has only 16 employees and, as Systrom acknowledged during Wednesday’s hearing, does not make any money. Asked how Instagram makes money, Systrom said: “That’s a great question. As of right now, we do not.” Systrom, like many in Silicon Valley, said he wasn’t focused on generating revenue, just on making “something that people really loved.”

But in the end, the company that had “defaulted” to remaining independent decided the Facebook acquisition was “the right thing to do for everyone involved” considering prevailing market conditions and competition from major players, Systrom said.

None of the details that emerged at the hearing were new. Facebook Chief Executive Mark Zuckerberg negotiated the deal over Easter weekend with Systrom. Systrom said Instagram had talked with potential acquirers big and small but never received a formal offer. The final valuation of Instagram before the Facebook deal was “just south” of $500 million at the end of March, Systrom said.

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