Mark Zuckerberg announced Monday afternoon that Facebook had purchased the photo-sharing application Instagram for about $1 billion in cash and stock. How do you buy a company like that—do you just hand over a big check?
Not anymore. Buying a company is a long and complicated process, but the final exchange of money typically involves little more than a bunch of lawyers exchanging emails or sharing a conference call before informing executives that the deal has been finalized. As recently as the 1990s, closings were done with the principal players hanging out in a conference room and eating bagels and cookies while paralegals shuffled papers around and did most of the work. However, these days many executives don’t even bother to call in. Before closing, each company’s legal team runs down a checklist to confirm that they have all the necessary “deliverables,” often assembled as PDFs: These include things like board and shareholder approvals, employment agreements, and stock certificates from shareholders.*
Someone from the acquiring company would then initiate a wire transfer that had been lined up in advance. To initiate the transfer, a lawyer or financial officer would simply make a phone call to the company’s bank, and then he or she might send an email to confirm the instruction. A representative for the acquired company would then follow with another phone call or email to its bank, to confirm that the transfer had been received on the other end. There’s not much suspense in the room, however: All the details have been meticulously prearranged, and for these specialists the process is routine. Once the transfer is complete, the representatives may email the executives from their respective companies to congratulate them (if the executives didn’t call in themselves), but experienced executives may receive this news as just a short email received on a Blackberry on the way to dinner.*
There’s one other component to a closing: the “deal toy.” By convention, the investment bankers for the purchasing company will deliver some kind of memento to executives from both the buying and selling companies, often at a dinner held sometime later. These might be customized paperweights, desk clocks, or Lucite plaques in styles appropriate to the industry involved. A health-care-related deal toy, for example, might resemble a pill bottle or toy ambulance. Technology deal toys might look like laptop computers. (Both deal toys and closing dinners have become somewhat less popular in recent years, on account of the recession.)
Corrections, April 18, 2012: The original version of this article described the closing as a meeting of top executives and shareholders with light refreshments, and the exchange of significant, physical paperwork. That information has not been current since the 1990s. (Return to the corrected paragraph.)
Additionally, the original version stated that cashier’s checks are sometimes handed over at the closing (in place of a wire transfer). It also said that the executives shake hands and later meet up for a celebratory dinner. Again, this information is out of date: Most closings are done through email communication, and do not usually involve a dinner. (Return to the corrected paragraph.)
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Explainer thanks Erik Gordon of the University of Michigan.
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