Facebook's Big Weakness: There's Nobody to Say No to Zuckerberg

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Mark ZuckerbergIf Facebook's $1 billion acquisition of photo-sharing-app darling Instagram was a shock to investors earlier this month, the social networking giant's board of directors probably had the same reaction.

According to The Wall Street Journal, Facebook CEO Mark Zuckerberg negotiated a buyout with Instagram CEO Kevin Systrom in private. Systrom initially wanted $2 billion for the company that has become a hit with digital shutterbugs given its seamless editing features and irresistible price. It's free.

Now, $2 billion is a steep price for a profitless company -- especially one that also isn't generating any revenue. After a few back-and-forth volleys between Systrom and Zuckerberg at Zuckerberg's home, the two agreed on a $1 billion buyout.
Reports later surfaced that Twitter was also interested in gobbling up Instagram.

The shocking part of the Instagram deal -- according to the Journal -- is that many members of Facebook's board didn't even know that a deal was in the works until the terms were finalized.

They didn't stand in Zuckerberg's way.

Bored of Directors

There are plenty of positive things to be said about founder CEOs who have a sense of swagger. Oracle's (ORCL) Larry Ellison is brazenly confident. He'll bash a smaller rival during a quarterly conference call, only to step in as an opportunistic acquirer a few months later.

Where would Apple (AAPL) be if Steve Jobs hadn't come back to return the company to its trademark qualities of premium design and bar-raising innovation?

Zuckerberg has a right to be cocky. His company is about to go public next month in a deal that may value Facebook at a cool $100 billion. He was ridiculed for turning down buyout offers at much lower price points along the way. His ego has been the stuff of books and even celluloid, but he's a winner.

The same can't be said for most of his critics.


However, Zuckerberg will soon learn that a board of directors is there for a reason. It's part of the checks and balances in the corporate system that make sure that executive compensation doesn't get out of whack, that only competence and excellence is promoted, and that a strong-willed 20-something CEO can't just barge into a boardroom to ask for a $1 billion check to buy an app maker that wasn't even around two years ago.

Bobbleheads in the Boardroom

Facebook has grown to more than 845 million global users. It would be silly to question Zuckerberg's vision -- or even his math in this month's Instagram purchase.

But while it's easy to want to bet on Zuckerberg, there's something wrong with Facebook's board if it lets him get away with this kind of behavior. It sets a scary precedent for showdowns in the future. The board that lets a CEO push it around now is not going to suddenly grow a spine in the future. Oh, and if there won't be showdowns in the future, then the board isn't doing its job. The child isn't supposed to bully the parents.

Gallery: Facebook - A Timeline
Facebook Gallery


"It's the first time we've ever acquired a product and company with so many users," Zuckerberg wrote in Facebook's blog after the deal.

"We"? Who are we kidding.

Facebook has a problem, and it's bigger than some $1 billion check.

Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article. The Motley Fool owns shares of Oracle. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.


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13 Comments

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redeemmemighty

Nothing will last forever....soemthing have to go gone one day. Facebook will be gone one day.

April 19 2012 at 11:12 PM Report abuse rate up rate down Reply
wtkacs

"...a board of directors is there for a reason. It's part of the checks and balances in the corporate system that make sure that executive compensation doesn't get out of whack, that only competence and excellence is promoted,..." ARE YOU KIDDING ME!!!! Who ever wrote this article hasn't been in the real world lately with failing companies CEO's getting millions as they abandon a company or get fired! Good for Mark, starting a company and not getting forced out of your own company by a Board of incompetent Directors. There is always risk, some more then others... but it is his choice. Mark You have my vote! If he makes a bad choice he pays the price.

April 19 2012 at 10:26 PM Report abuse rate up rate down Reply
excrusade

@jenyouwino You obviously no nothing about legal case law and setting precedents. A judge already ruled that surfing the web was no different than reading a newspaper, etc... How one distracts themselves doesn't matter, but if the employee handbook strictly forbids people from using facebook, the boss will let them know. Also, another legal matter, a person can only be fired for breaking company policy after they have been warned in writing once and then verbally. You must be a small business owner who knows nothing about the law and you'll eventually be sued for wrongful termination and have to pay unemployment, etc... Don't worry, big corporations are aware of how to handle slackers and that's why you're not head of one, lol.

April 19 2012 at 9:06 PM Report abuse rate up rate down Reply
jenyouwino

I'm stuck in an older time when there wasn't all this social media to suck up productive time. I've watched others at work who have split screens. One that the managers can see as they pass his/her office where there are complicated spreadsheets and in depth company reports that look impressive. Then there is the other that faces the employee where the real work is being done. But these slackers aren't stupid. Their covert recreational activities can be quickly wiped by by pulling up more company based reports. I'm sorry, but companies have the right to police your activities because you are using their computers and servers to pass all that personal fluff over the web. Facebook, Linkedin and so on have to be robo-targets for properly programmed servers. I've heard comments like, "I'm not worried, our IT department is clueless....!" Perhaps some, but not most. You are on the radar screen, and partaker beware. Furthermore, you don't know who else Zuckee is in bed with. This is where the real concern lies. It may not be an issue now, but it is a very tempting target for those who'd love to know more about you without you even knowing it's happening. Am I paranoid? No. Just stupid like a fox.

April 19 2012 at 8:12 PM Report abuse rate up rate down Reply
TxPBRgal

facebook is becoming nothing but games and sharing of quite pics, BORING

April 19 2012 at 6:18 PM Report abuse rate up rate down Reply
1 reply to TxPBRgal's comment
TxPBRgal

quote pics

April 19 2012 at 6:18 PM Report abuse rate up rate down Reply
guzmanalex

Let the man do what he's supposed to do, which is to grow the company.

April 19 2012 at 6:11 PM Report abuse rate up rate down Reply
Ackadamius

Couldn't the same have been said for Apple's Steve Jobs? Didn't that work out okay? I'm not saying Zuckerberg is as innovative as Job's but he's obviously got some smarts to him to dominate in Social Networking so profoundly.

And what's the board supposed to do? Read the SEC IPO filing. He has majority control of the shares (his own and he's been granted voting rights to a huge chunk of shares from venture capital investors). The board IS Mark Zuckerberg. It's the same with Google. 3 people (the founders) control a majority of the shares. Nobody can tell them "No" either. A little research would have gone a long way with this article.

April 19 2012 at 5:30 PM Report abuse rate up rate down Reply
mebecarl

We can only hope that GREED will somehow kill little Markey.

April 19 2012 at 5:17 PM Report abuse rate up rate down Reply
Rushi2

I don't like the new Facebook "Timeline", but obviously Facebook is and has made so much money off of Facebook they don't care about "Customer Satisfaction" anymore. How about a "Facebook Survey" to its followers for Facebook users for input and customer satisfaction? Charles / UC (April 19, 2012)

April 19 2012 at 3:01 PM Report abuse rate up rate down Reply
1 reply to Rushi2's comment
Welcome Scott!

Yes a majority of Facebook users do not like the new Timeline, But Mr. Zuckerberg thinks he is smarter than everyone else, so he thinks everyone wants and needs Timeline with no choice.Mark Zuckerberg is obviously arrogant and egotistical (yes much like Steve Jobs). Like I did today, everyone who doesn't like Timeline and/or Mr. Zuckerberg's arrogance, should delete their Facebook account before May 17th, then set back and see how his big IPO offering goes. I hope the snot-nosed brat falls on his face!

April 19 2012 at 8:06 PM Report abuse rate up rate down Reply
mbzmc

Does anyone know if it is possible to opt out of the new facebook timeline layout? It is really bad, slow to load, confussing, doesn't fit the screen, and makes little sense......As far as buying the stock after the IPO, On paper it makes no sense to me but I would bet that people will be willing to pay higher prices per share betting that some else will want to pay more than you did tomorrow, just like so many "growth" stocks....Just a piece of paper that you hope someone will pay more for than you did. Facebook will be ruined as it is designed to sell more advertising just like what happened to Google. Google I think is pretty useless to find local businesses, the yellow pages is the place we look now. Nothing but thousands of ads on Google when you search for something local.....Too much time wasted on Google searches!

April 19 2012 at 11:35 AM Report abuse rate up rate down Reply