- Google's stock split will be effective 3 April 2014
- Google has now put some safeguards in place to protect shareholders' interests
- Google's stock split might not be as bad as it seemed initially
Investors who owned shares of Google (NASDAQ:GOOG) on 27 March 2014 will wake up with twice the number of shares, and a price that’s difficult to predict on 3 April 2014. Here’s a round-up of Google’s complicated stock split that was announced along with the company’s Q4 2013 results in Jan 2014.
Google’s stock split
Currently Google has 2 classes of shares, Class-A shares and Class-B shares. Class-B shares are held by Google’s management and holders are entitled to 10 votes per share. These shares are not traded publicly. Class-A shares are traded publicly under the ticker GOOG and come with 1 vote per share.
After the split, Class-A shareholders will have 1 Class-A and 1 Class-C share for every Class-A share that they currently hold. The downside is that Class-C shares won’t have any voting rights.
Class-A shares that currently trade under the ticker GOOG will trade by the ticker GOOGL and the new Class-C shares will trade as GOOG.
Why Investors were unhappy
Between CEO Larry Page, Chairman Eric Schmidt and co-founder Sergey Brin, Google’s top trio control more than 61% of voting rights due to their holding of Class-B shares. In the normal course, granting of ESOPs and using stocks to pay for acquisitions would dilute EPS and control for shareholders across the board. However, the stock-split would allow Google to use its Class-C shares for these activities, while the management stays protected from dilution of control.
Further, one would expect shares without voting rights to trade at a lower price as opposed to shares with voting rights, implying that investors could lose money. Finally, the management would also have the option of lightening its bag of shares by selling Class-C shares, again, without losing control in the company.
So, it is but natural that Google’s attempt to have the cake and eat it too found some opposition, with shareholders moving court arguing that the terms of the split were unfair.
The Final Outcome
There are three key outcomes that you should know about as a shareholder or potential investor.
- Google will compensate shareholders if Class-C shares end up trading at a lower price.
In the first year of its trading, if Class-C shares trade at an average gap (below Class-A shares) exceeding 1%, Google will pay Class-C shareholders 20% of the difference. The compensation will range between $300 million and $7.5 billion with the largest payment being made if the gap on an average is 5% or more.
- Google will consider using Class-A shares to pay for acquisitions
Though the word ‘consider’, doesn't ensure much, Google has agreed to stricter board reviews of acquisitions that will be paid for using company stock.
- C. Google will consider disbanding the multiple classes of stock if Brin and Page start selling their stock
If this is implemented, it would level the playing field for all owners of Google, be it the management or the average investor, at least relatively.
While the investor that likes to get involved and be heard might feel a tad uncomfortable, its not something that should perturb the average investor because with 61% control, the same management that vetoed the stock split can veto pretty much all else.
As far as the financial implications are concerned, the safeguards that have now been put in place make the stock-split look less lop sided than it did initially, and investors should feel more confident.
Google’s Class-A and Class-C shares have begun trading on the stock exchange on a ‘when issued’ basis under the tickers GOOAV and GOOCV. So far, the difference between the prices of the two is less than 1 USD. Google’s commitment to Class-C shareholders could make these shares worth considering for investors who prefer to own companies passively.
Google's stock split is definitely pro-management, but not necessarily anti-investor.
To see Google’s latest stock price movement, click here (NASDAQ:GOOG)