Google Split Preserves Founders' Power
Apr 16, 2012 9:44 AM PT
Google has announced plans to issue a new class of stock to existing shareholders. Normally, a stock split is viewed positively by shareholders and the Street because it implies the company expects the stock to continue to grow.
However, the way Google has structured this split has raised eyebrows among corporate governance watchers.
"It is an unusual and unique structure, and I can understand why it has made some people unhappy," Sris Chatterjee, a professor of finance and business economics at Fordham University, told the E-Commerce Times. "It is viewed as undemocratic and giving a few people entrenched corporate control of Google."
New Class, No Voting Rights
What Google plans to do, according to a letter posted on its website by cofounders Sergey Brin and Larry Page, is to create a new class of nonvoting capital stock that will be listed on Nasdaq. These shares will be distributed via a stock dividend to all existing stockholders. The owner of each existing share will receive one new share of the non-voting stock, giving investors twice the number of shares they had before.
The Class A shares will continue to trade under the "GOOG" ticker symbol and the Class C shares will trade under a different ticker symbol, explained David Drummond, Google's chief legal officer, in a postscript to the letter.
Class C stockholders will be able to trade their shares just as they can with Class A shares today.
"Except for voting rights, the Class C shares will have the same rights as the existing Class A and Class B shares," Drummond noted. Also, the Class C stock dividend will be tax-free.
The bottom line is that "these new shares will have no votes at all," Chatterjee said, "and corporate power will remain, as it has been, concentrated with the founders."
Some shareholders won't be supportive of the change, Page and Brin acknowledged in their post, and would have preferred the traditional governance model that's common among other tech companies.
"But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users," they said.
Pointing to the long development behind Android, Brin and Page noted that short-sighted investors could have derailed that if they had had the power.
Google declined to provide further details.
Normally a Good Thing
The uproar over the governance issue is distracting from other implications of the stock split, Chatterjee said.
Stock splits have been studied very closely, and there are a number of hypotheses as to why a company would choose such a route and whether it's good for shareholders, he said.
"The street wisdom is that if a stock's price has risen too high, it needs to be split so it will trade more and the company will get more liquidity," Chatterjee explained.
"Another theory is that a stock split acts as a signal to the market that there will be favorable earnings down the road," he said. "In general, a company doing a stock split is expected to have good news for the market, which is why, on average, a company's stock rises after it announces a split."
Not everyone is bemoaning the new structure.
The additional control the founders are accruing under the split is not a bad thing, in Google's case, maintained Trip Chowdhry, managing director of equity research at Global Equities Research.
"I think this will keep Google from turning into another Yahoo," Chowdhry told the E-Commerce Times. "Look at the mess Yahoo is now, and in large part it is due to activist shareholders."
Innovation May Need Founder Control
For the tech space especially, Chowdhry said, founder control and ongoing innovation often go hand-in-hand.
"In the tech industry, innovation velocity is the only way forward, and in this situation the founders are the ones best able to advance Google for the long term," he observed
A long-term investor does not necessarily have the skills to foresee which products will be successful in the market, Chowdhry said.