This is meant do to one thing -- let the founders retain control while allowing for large stock acquisitions. It's possible Google was muscled out of the Whatsapp deal simply because they couldn't pony up the money. $20B is almost half of their cash on hand. Note that the Nest and Waze acquisitions (small in comparison) were paid for almost entirely in cash.
Google wouldn't have paid $20 billion for Whatsapp, and the only reason Facebook did is because their stock is very overvalued, and Zuckerberg knows that, so he's taking advantage of it while he can. Google's stock isn't that overvalued, if at all so they can't buy apps with $20 billion of what is basically "play money".
I think this is correct. The WSJ today had a piece offering much the same analysis: that because Facebook's stock is (arguably) overvalued relative to revenue and expected growth, investors are encouraging the company to do these sorts of deals.
It's a perfectly logical outcome if you have high stock valuation and not as much cash on hand.
I understand why we have dual-class share structures. There are cases in which investors may trust management more than their fellow shareholders.
Yet I am concerned about the structures' dynastic qualities. Larry Page is a competent executive. That may not be the case in 40 years. Tom Perkins's letter to the editor comes to mind [1]. The question of what happens after Page is more troubling. Limiting control to the founders' offspring is concerning. Granted, there are valid counterexamples. Warren Buffett is as old as he is wise. And Samsung seems to be plodding along just fine despite its family's feuds.
But shareholders should have input into these issues. Perhaps the super-voting stock lapses to normal stock after its original recipient's demise. Or maybe non-voting shareholders have one right: the right to call and vote on motions of no-confidence. Such motions, if passed by a super-majority of subordinated voters, would collapse the super-voting stock to normal stock.
Aristocracy runs thick in the veins of European business. It is worrying that we may be sprouting our own contractually-annointed Silicon Valley royalty.
I thought the old Class B shares converted on transfer? Did the split change that, or am I misunderstanding that passing the shares to offspring would be a transfer?
People thought the same about YouTube, but that turned out to be a brilliant (and very profitable) move.
Then again, they also thought the same about AOL/TimeWarner, and they were absolutely right then.
It's usually pretty futile to try to predict the future. I can see Zuck's reasoning with the Whatsapp purchase, though, and I don't think he's insane. He and Larry probably understand the structure of the tech industry a lot better than most people.
The way I see it: Facebook's edge is its social graph. WhataApp had independently built a massive social graph, just like Instagram did. Facebook simply cannot afford to not acquire these companies.
Google already had a solid youtube competitor. The primary reason for the acquisition was not for the userbase, but rather because youtube was being sued by the entertainment industry, and by google stepping in to take over and fight the legal battle, they managed to preserve the future of online video.
It was definitely the right move, but this situation can't be compared to the WhatsApp acquisition.
Interestingly the size of WhatsApp (the team and the required hardware) compared to its userbase might actually be one of the reasons why the price went so high.
In other words, - they had a very good engineer to end user ratio.
That's the point of this change - Google weren't required to pay cash, but given their limited ability to offer stock deals without dilution of the founders' voting rights, it was probably not possible to offer stock.
The new shares issued here have stricly no voting rights.
So they can offer them in any quantity without having to worry about diluting their voting rights. Whereas offering 19B in voting shares (even though I'd imagine class A shares have less rights than class B) might have been enough to dilute Brin and Page's voting rights significantly.
Bad news for Google shareholders in the long run. Companies with multiple share classes having different voting rights tend to underperform companies with stock that is one share, one vote.
Please note: that doesn't mean Google won't do well, but that on average it's likely to do worse for shareholders than if all stock had the same voting rights.
Yes, but eventually they'd have issued enough class A shares to make the class B shares less significant. Now Larry and Sergey can keep their majority votes safe forever. In the long run, to the likely detriment of Google shareholders.
Says who? I'd much rather have long-viewed leaders running the company than a horde of outsiders looking to maximize short term gain and flip their positions. This seems like great news for long term investors.
Says the study I cited, which compared historical shareholder returns for companies with stock voting arrangements like Google's to companies having one class of stock that each has one vote.
I skimmed it, it seems a bit suspect, holding up as evidence that four relatively recent tech IPOs have dropped since their debut, and the original research was conducted by what sounds like a shareholder advocacy group. Zynga, Facebook, and Groupon didn't drop because of the share structure, and it's disingenuous to suggest that that was a probable reason.
I've seen the damage that focus on short term share price wreaks on companies in the long run - it's paralyzing, as they're forced to focus on the wrong things. Activist shareholders seem to focus on short term returns. Not being subject to that, and being able to focus on long term initiatives seems very beneficial for long term shareholder value as long as you have a good leader.
But that good leader caveat is a big one. Multiple share classes might be correlated with having a bad leader.
The study itself looked at 114 companies in the S&P 1500 (not a typo). The majority of them were consumer discretionary and industrials, not tech.
One thing the study didn't make clear was what its control was. It seemed like they were measuring returns relative to the S&P 1500 as a whole, but this introduces a lot of conflating factors. The study also found that controlled companies with a single-class structure (eg. WalMart, where there's only a single class of shares but the Walton family owns >50% of them) performed better than both multi-class and non-controlled companies, across all time periods. I can't see any rational reason other than random chance that this would be the case, and I would be skeptical of any study with a sample size of 114 non-randomly-chosen entities.
Yeah, when dealing with a few instances, it's hard to say if it's just random variation. The summary he pointed to called out the 4 tech companies mentioned as evidence, I didn't look to see if they were emphasized in the source. Thanks for summarizing what you read.
"Ownership" without control gives you precisely nothing, except for perhaps standing in a shareholder lawsuit. A company being unaccountable to its investors should make it unattractive as an investment.
> "Ownership" without control gives you precisely nothing
This statement implies non-voting stock is worthless. That is untrue. There are people willing to pay good money for nonvoting stock.
Imagine a dual-class share company. Class B shares cannot vote. Class A shares can vote - they own 100% of the vote share. But both classes are pari passu in economic terms - if Class A gets a $1 dividend Class B must receive the same. Further, let there be 1 Class A (voting) share and 999,999 Class B (non-voting) shares. Would you believe those 999,999 non-voting shares are worthless?
Both voting and non-voting stock take part in a company's cash flows - their discounted cash flow value is identical. The only time the difference (or "spread") matters is in the event of a proxy fight or takeover, i.e. a contest of control. The spread is a function of the probability that your vote is decisive - that absent your vote there would be a tie - in a meaningful contest of control. Small odds, which is why voting-nonvoting spreads are minor in the United States (I did a thesis on the subject - in Italy these spreads are around 10%).
> Would you believe those 999,999 non-voting shares are worthless?
If the owner of the company had shown no indication of ever wanting to pay a dividend, and if there was no reason to assume the company would ever be liquidated, then yeah -- there is no reason for those shares to have any non-zero value. Future cash flows are only relevant insofar as shareholders can receive or influence them.
If those 99999 shares have any value it's because they're the official baseball cards of the company, and baseball cards' values increase when the player on the front performs well.
> If the owner of the company had shown no indication of ever wanting to pay a dividend... future cash flows are only relevant insofar as shareholders can receive or influence them
The stock of a company which will never pay out any dividends is worthless. The company's profits will go to everyone - bondholders, suppliers, customers, employees - except the shareholders. This will continue until liquidation, at which point the shareholders will be impaired or wiped out.
If a stock has value, voting or not, someone expects dividends. Investors may think management is bluffing - then both classes of stock would receive the same dividends. Or they may think they can coerce management into paying a dividend. This would create a contest of control. A temporary spread between the two classes would emerge. The contest of control has two possible outcomes. Management could forever resist the shareholders, in which the value of both classes is zero. Or shareholders could win, pay a dividend and restore parity between the classes.
Why does Google say it will never pay dividends? Because our markets punish growth companies acknowledging slowing growth. Announcing dividends is a sign of slowing growth. It seems like a specific type of investor invests in growth companies. When growth slows those investors hand their shares over to a different set of investors, value investors. The trade-off is tricky, and often involves proxy fights and management changes.
The discussion has referenced management owning the voting shares. Such shares have value, for management or any other party that may be paid for services provided to the company, even if they never pay dividends, because self-dealing.
Would you say a dividend is less likely to be paid out after this? Assuming most of the voting shares are Google employees (management) is there reason to pay a dividend over just increasing their own salaries?
That seems simplistic because dividends are (iirc) better tax-wise than salary, but it seems having to match the dividend to non-voters might offset that? I know Google and the people I'm talking about are technically different, but they completely control Google's votes so does that really hold in practice?
When JumpCrisscross mentions a dividend, he means any dividend paid by the company in the future. There isn't a special dividend paid on splitting.
Although sometimes there is. A few weeks ago, Vodafone got rid of its stake in Verizon, and did that by distributing some of the shares to its shareholders, and selling others and then distributing the proceeds. Effectively, there was a split and a dividend at the same time.
As someone who is partly responsible for the sanity of market data in a financial application, i can tell you that my colleagues and i look forward to such manoeuvres with utter dread.
You'd think so, but in practice it's the other way around. The decision to pay a dividend is effectively made by the voting shareholders, and the voting shareholders see paying a dividend as giving money away to the non-voting shareholders.
Is there anything Larry and Sergey could have done when they first set up the shares that would have avoided (or delayed) having to do a stock split? e.g. given the Class B shares 20 or 100 votes?
Yes - they could have issued the Class A without any votes from the start. That would have avoided the split. They could have also, as you said, given their Class B shares more votes per share. That would have delayed the split.
> Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a century’s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person. What’s more, when directors go against shareholder wishes—even when a loss in value is documented—courts side with directors the vast majority of the time.
The problem with this saying that "courts side with directors the vast majority of the time" is that it ignores which parties are involved in the lawsuits. In most cases, the suit is a class-action brought against the corporation by disgruntled current or former shareholders; employees are not parties to the suit. In this case, the petitioners are seeking restitution which will come out of the pockets of the current shareholders, as the corporation may be forced to pay them, thereby reducing the corporation's assets and total value.[1] If you are interested in this issue, you should read up on "Halliburton v. Erica P. John Fund", which has been argued this Supreme Court term and not yet decided; many interesting arguments are contained in the various briefs.[2]
Right. "Ownership" is a really fuzzy thing; in the context of owning shares of a public corporation it gives you the right to be treated equally (in some senses) with other shareholders, standing for shareholder lawsuits alleging breach of fiduciary duty, and most importantly the right to select the board and vote on certain proposals.
No voting rights takes away the most important component.
It has not been shown that voting is the most important and effective means of maintaining accountability. There is a long-standing debate as to whether voice (voting) or exit (the ability to exit a long position) is more important.[1]
It should be noted that Apple doesn't have this "minority shareholders are sheep with no say" structure and thus was quite open to pressure from them(Icahn et al).
Personally, I am all for activist shareholders in a public company and proxy fights. Google and Facebook are heading down a path to stagnation at some point. What then?
Shareholder accountability is pretty much bogus. The only shareholders who have ever had a real say are those who owned vast quantities. The flood of blind investing through retirement funds has further diluted shareholder influence to little more than demanding increasing share price.
Large institutional investors like mutual funds, pension funds, etc. have at least some of their incentives aligned with their own investors - they want the value of their holdings to go up (to increase management fees), which means exercising some level of corporate governance. For instance, looking askance at value-destroying vanity purchases (arguably, Oculus being the latest example).
Even this minimal level of oversight isn't possible when they have no voting rights worth mentioning.
Shareholders are so far out of the loop, rarely are they consulted on important business decisions. Usually when things start going sour is when they start making noise, and by that time it's often too late. Most aren't going to question the actions of the company so long as the price keeps going up. While an institutional investor could divest themselves of a stock if they don't like how the company is managing their purchases, it would likely be hard to justify removing GOOG, APPL or FB from their portfolio right now. It's not like mutual fund managers are that great at beating the market, especially after fees.
Some managers make turning around failing companies as stockholders their business. They go in, push for changes that will increase the value of the company, and exit, taking the cash and look for another failing company they think can do better.
>The flood of blind investing through retirement funds has further diluted shareholder influence to little more than demanding increasing share price.
But this is the only thing shareholders have the right to demand anyway. As long as they can ensure the CEO and board of directors are maximizing share price, the system is working.
Why would it be better to own stock in a company subject to the control of ever-changing third parties whose goals and motivations I cannot know?
At least if I bought Google stock (which I never have directly), I'd know my investment would be shepherded by three specific individuals whose characteristics and motivations are at least not entirely mysterious, nor entirely in conflict with my own, until they decide it is appropriate for that control to change.
>Why would it be better to own stock in a company subject to the control of ever-changing third parties whose goals and motivations I cannot know?
Actually motivation of the board of a typical is well known: to get as much money as possible. Most of public companies are owned by institutional investor, i.e. mutual, pension, hedge, etc funds.
I'm talking about the shareholders who choose the board, not the board itself.
Institutional investors change their holdings all the time. And many of them are controlled by people I believe should never see the outside of a prison. (And even the ones that aren't, might be tomorrow!)
So again, I ask, why is it better to risk my money in investments this ever-changing cast of characters can control, rather than companies like Google?
"The much-awaited Google 2-for-1 stock split is finally happening on Wednesday when shareholders of record as of March 27 will get two shares for every one they owned."
Out of curiosity what happens if you bought shares on March 28th? Does your stock price just go to $600 or can you petition Google to have the new Class C shares issued to you to make up the loss in price?
NASDAQ made the situation a little more complicated by reporting GOOG as the price of the Class A share (soon to be GOOGL) plus the price of the right to have a Class C share distributed to you. My brokerage linked me to this FAQ: http://nasdaqtrader.com/content/GOOGfaqs.pdf
"On March 27, the Class C shares will commence trading on a WHEN ISSUED basis (GOOCV). At that same time, the EX DISTRIBUTION WHEN ISSUED market for the class A shares (GOOAV) would be made available. This market represents the ability to trade the Class A stock without entitlement to the Class C distribution.
From March 27 through April 2 we will be trading: Class A shares regular way, with entitlement to the class C shares (GOOG); Class C shares when issued (GOOCV); Class A shares on an EX Distribution, when issued basis (GOOAV)."
So on the 28th, you would have a choice: If you bought shares of GOOG, you'd pay the full price, and you'd be entitled to the stock distribution. If you bought GOOAV or GOOCV, their prices would reflect the fact that you would not be entitled to the stock distribution, which means you'd pay roughly half the price of what you'd pay for GOOG.
A handful of people ended up with margin calls in the order of six figures because the broker hadn't yet adjusted the contracts. Not fun to wake up to.
Sorry, can't find it, but one of the recent news stories on the split said there would be a special dividend that kicks in after 2% divergence in price.
It's a civil suit, not a criminal suit. It's a negotiated settlement or a judge-imposed settlement. But there's no law that was broken here with a mandated penalty.
(And there are also Class B shares which are not publicly traded, and have a guaranteed 1/3rd vote share. They are all under the effective control of the current President/CEO, who is the son of the original founder.)
Yeah, the first thing I thought about when I heard this is that these two shares would be ideal for pairs trading! (Though presumably this will be arbitraged away quickly).
> Though presumably this will be arbitraged away quickly
Only if the market believes they have the same fundamental value.
Edit: well, if differences in price stabilise then you might "arb" unequal price movements away, but it's still risky. The best you can probably do is bet generally on corellated movements, not fine-grained one-to-one matching.
Has a company done something like this before? I've heard of some having a stock that sells for orders of magnitude higher/lower, but not for the same price.
'Hong Kong’s bourse doesn’t allow share classes with different voting rights, as the U.S. does. Such arrangements helped Zuckerberg and Google co-founders Larry Page and Sergey Brin keep control of their companies after they went public."
I traded in Russian stock exchange and many companies had "preferred" stocks which didn't have voting rights. Usually, they are traded substantially lower than "normal" stocks.
Honest question: why do voting shares get traded at all? In most cases, several specific people will have majority control and will either retain it over time or deliberately give it to someone else. Sure, I can buy up a large portion of the stock, but for the most part, never a majority. So why bother trading voting stock at all? Or am I missing some power that a minority stakeholder can have with, say, 10% ownership?
Non-voting shares weren't generally accepted 15 years ago. Page+Brin were able to secure 10%-voting shares for the IPO and employee RSUs. Now they have stopped the creation/distribution of new tradable voting shares.
Every existing class A or B share will be matched by a class C share. Most Googlers had class A shares before, so now we'll have half class A and half class C, i.e. twice as many total shares, with the same number of votes as before.
Until the late 1990's there were SEC rules governing when you could have three vs four or five letters.
You might not be surprised that the origination of the short naming convention was heavily caused by the ticker tape machine (dramatically more convenient in most respects to just enter a short symbol rather than the whole company name).
I'm assuming they are also planning on buying back a chunk of the A-shares (and will only issue C shares in the future)? Will be interesting how much the price gap between A and C, or in other words the premium on control, will be.
“They couldn’t do a big deal before using stock because it changes the voting rights,” he said. “Now, they’ve got a mechanism where they can use their paper for deals and not lose their majority voting rights.”
This implies so. And FB has done $22B in deals since the IPO.
No. This essentially means there will be two classes of Google Stock (A and C) with Class A stock having more voting power than Class C stock from a shareholder prospective.
This dilution of shares essentially gives those with a large share of stock options (like Brin & Page) more power.
Edit: As a user pointed out, Class B should be Class C
(a) there already were two classes of shares, A and B. This creates a third class C with no voting power
(b) the argument in the article is that Google would then issue class C shares for use in acquisitions. Brin & Page did not want to issue more A shares, which would risk their majority control; but they would be willing to issue C shares and use them to acquire companies as they would have no dilutive effect on their majority control.
Anyone know the tax implications of this? I have seen splits before but supposedly this was equivalent to a special dividend as the stock's value halves.
Because the "GOOG" you saw listed was not Google's Class A shares, but rather the price of the Class A shares plus the right to receive a Class C share.
There seems to be a push to diversify and expand Google's income recently. Google Play Music All Access, Google Helpouts (20% cut), this stock change, Google fiber (while competitively priced, I expect there will be long-term profits), Google Glass, etc.
I have been noticing this and assume it's meant to help them fund their robotic and autonomous car projects. These are likely capital-intensive segments of the company.
Google have been trying to find something apart from advertising since pretty much day dot. It's a strategy pioneered by Microsoft, I call it "spaghetti cannon". Turn your free cashflow into spaghetti, fire it at a wall, hope something sticks.
It's sorta-kinda worked for MS. They have 4 or 5 distinct lines of business, each of which could qualify as an F500 alone.
Google don't have that. They have 1, and only 1, line of business sustaining every outlay they have. They've only ever had 1, and only 1, line of business, right back to their first public reports.
One of them is advertising. It is 95% of revenue. If it stopped, Google would effectively die.
The other is Motorola Mobile, which is a side-effect of buying it. If it stopped, I am not sure there would be much more said than a few B-mag retrospectives.
So I guess I am wrong, Google is only 95% an advertising company.
Well I wouldn't say they have only a single line of business.
Yes, they make pretty much all of their profits from advertising.
However they no longer just do searches.
They do email, file hosting etc.
You name it and they probably do it.
They do make money from ways other than advertising too. They have quite a few pay to use services. Like business emails or Google Drive.
> and yet none of them make money except search advertising.
I actually think lots of them make money -- over $5 billion in non-advertising revenue in 2013 [1]-- its just they are dwarfed by the scale of the revenue from search advertising ($50 billion in 2013.)
> they haven't successfully SOLD anything to date.
If they haven't sold anything but advertising, they must have just conjured that $5 billion in non-advertising revenue (and that total, and the proportion of non-advertising revenue to total revenue -- has been growing every year) in 2013 out of thin air. Which, you know, would be even more impressive than selling stuff.
91% of their business is advertising, 9% is other stuff including android apps, chromecast, chromebooks, fiber, app engine. The actual number is 4.927 billion for 2013[1].
They have not really had a successful product outside of advertising. Chromecast is probably the closest thing to a success out of all the other things they do. Seeing as how they don't have a single business line over a billion, I'd consider all of them hobbies at this point for a company the size of google.
Apple TV is a > 1 billion product now, and it is absolutely a hobby for Apple. Yet they have 4 different product lines that are huge businesses. Microsoft has a lot of huge business lines. Google has advertising and a bunch of hobbies. Hopefully at some point they turn into something. I'm specifically rooting for Fiber. But that doesn't mean it's true right now. It's just not.
Well hobbies to Google or not they're still big businesses compared to most (and most are growing). Actually having a lot of small "hobbies" seem quite a good way to diversify. Although they still make most (I think) of their profits from the main search they're clearly still making a lot from all the other things that they do. It's not like they lose money on them all or anything.
I do wonder sometimes what Android could have meant to them if they had kept it more close hold and made and sold their own devices.
Sure they got lots of other companies to do the expensive hardware R&D, manufacture and marketing, but in the end, what's a multi-billion dollar market in devices is still just a funnel into line-of-business #1.
Even when they work with external suppliers (and a few of them for some reason) for items such as the Nexus devices, they still have failings such as very flat shapes that are hard to hold comfortably without dropping and smashing (like the older Nexus phones).
If they had attempted to do their own hardware, it would have been a horrendously uphill battle against the phones in the market at the time (Apple had tiny share, Nokia colossal).
Putting out the OS meant that hardware manufacturers could compete with different features whilst still (theoretically) having a common OS that users could mostly navigate around and app developers could write for. Contrast this with Nokia at the time, where S40 etc. worked wildly differently on different phones, with different JSRs supported by the J2ME runtimes on each phone, and where they essentially competed with their own other Nokia phones for specs; Nokia did a massive range of phones that were mostly the same but looked different or had very mild changes - it was too much choice!
This way Google could carry on doing software and leave the hardware to external companies that were used to doing hardware. I still have my TMobile G1 though, for history's sake. Don't use it though - it practically has no RAM left over after boot.
Windows and Office have locked users in for many years. But hardware cannot. Many years ago I was a Dell user, then I am now a Mac user. A few years back I was Nokia and then Sony Ericson and then Samsung, Motorola and now Apple. I think Google made a smart move to only make very limited hardware product on their own.
not only that, but they already had that funnel wrapped up with their partnership with apple. this only gave them slightly more control over the funnel, with no real profits to show for it, while hurting apple (which from a google perspective might be worthwhile in and of itself? I'm not sure apple had any plans to go into search, but maybe).
Correct, they (or anyone else) are not making money directly off this. Just like a regular stock split, when there is a 2 for 1 split each share is instantly worth 1/2 and no one is richer.
