Google Is Not Doing a 2 For 1 Split OR: “Let’s Talk About Dual Share Class Structures”

I got a little frustrated looking at the $GOOG stocktwits stream this afternoon when Google announced their quarterly earnings and a new share class.  Many messages were excited trumpeting the “2-1 stock split,” but that’s not quite what’s going on.    Larry Page and Sergey Brin explained pretty clearly what was going on in a letter that was released along with the earnings.    Go read it – and then we’ll continue.

Sergey and Larry try to spin this action as: “It’s effectively a two-for-one stock split—something many of our investors have long asked us for.”  Well, it’s KINDA like a 2 for one split, except that the shiny new share you’re getting isn’t as good as the share you already have – the new share will be nonvoting.

As Larry and Sergey explain, Google already has a dual-share class structure.  They set the company up like this for a reason – so that they could maintain control.  The “A” shares, which we know as simply $GOOG, trade publicly and have 1 vote per share.  There are also “B” shares which are not listed, and have ten votes per share.   Thus, someone can’t gain voting control easily by accumulating GOOG “A” shares, as the votes are concentrated in the B shares.    A friend sent me this Bloomberg snapshot that shows the details of each class:

Today’s announcement is of a third class of stock which will have ZERO votes.   While Sergey and Larry cite the  “trend for newer technology companies to adopt strong dual-class structures,”  I’m not aware of any company that already had a strong-voting class (like GOOG’s 10 vote B shares) as well as a weak-voting class (like GOOG’s single vote listed A shares) and then still instituted a third non-voting class.   Such a company may exist – if you’re aware of one, let me know. (EDIT: two commenters have noted CMCSA/B/K and DISCA/B/K)

The co-founders explained that “These non-voting shares will be available for corporate uses, like equity-based employee compensation, that might otherwise dilute our governance structure.”   In other words, they’ll give their employees non-voting stock so that their own voting shares don’t get diluted.   Perhaps they’ll also use these new shares to make acquisitions? (Well, check the footnote)  Perhaps they’ll sell off their own non-voting shares (again, keeping their own voting concentration) as part of their planned regular stock sale scheme that they’ve enacted?  No – it turns out they cannot do this – again, see the footnote.

So anyway, let’s call the shares GOOG (1 vote), GOOGb (10 votes) and GOOGc (no votes).  For each share of GOOG that you currently own, when this distribution is all said and done, you’ll still have your existing GOOG share plus another share of GOOGc in your account.  The price of each will drop to roughly half the current value (as the shares outstanding double, of course).   There will likely be some spread between the GOOG and GOOGc shares – they won’t trade at exactly the same price.   We would expect the GOOGc shares to trade at a discount, as they are inferior: they lack votes.  However, in a way, the fact that the GOOG shares are already “vote deficient” compared to the 10 vote GOOGb shares kinda helps the GOOGc shares in that it makes their voting inferiority less of a big deal.  In other words, if the GOOGb shares already rule the roost from a voting standpoint, then the GOOGc shares really aren’t that much worse than the GOOG shares – cause neither of them can swing the vote.

All in all, the point of this whole exercise is, in the co-founders’ own words: “consistent with the governance philosophy we articulated when we took the company public.”   That governance philosophy, also mentioned in the letter, was:

“The main effect of this structure is likely to leave our team, especially Sergey and me, with increasingly significant control over the company’s decisions and fate, as Google shares change hands…

New investors will fully share in Google’s long term economic future but will have little ability to influence its strategic decisions through their voting rights…

Our colleagues will be able to trust that they themselves and their labors of hard work, love and creativity will be well cared for by a company focused on stability and the long term…”

In English: It’s all about control.

Related:  Google 2012 Founders’ Letter


disclosure: No position in $GOOG

footnote:  from the letter:

“It’s important to bear in mind that this proposal will only have an effect on governance over the very long term. In fact, there’s no particular urgency to make these changes now—we don’t have an unusually big acquisition planned, in case you were wondering. It’s just that since we know what we want to do, there’s no reason to delay the decision. Also note that there will be no immediate change in votes, because everyone will still have the same number. In addition, Eric, Sergey and I have all agreed to “stapling” arrangements so that, above set thresholds, if our economic interest in Google were to decline, our votes would as well. We also have provisions to ensure all shareholders are treated fairly from an economic perspective. “

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