- The benefit of GOOG's recently announced dividend/stock split for shareholders is questionable.
- Corporate skepticism of activist investors and a trend toward multi-class common stock share structures are meaningful trends worth observing.
- I'll explore the likely post-split treatment of GOOG by institutions, indices, and individuals.
After nearly two years of litigation, Google (NASDAQ:GOOG) has announced a one-time dividend (i.e., stock split) that will occur on April 2, 2014, for shareholders as of the record date of March 27. A new series of non-voting Class C shares are expected to begin trading the next day, April 3, and will assume the original ticker symbol "GOOG" while the original Class A shares will trade under the newly assigned ticker "GOOGL."
This article seeks to explore the many implications of the stock split, ideas within an ongoing debate over whether or not companies are able to create stockholder value through voting rights, and a growing skepticism by insiders -- and the public alike -- toward activist investors.
I was initially excited, as I've always intended to hold GOOG long term, when I first saw a user comment below the (mixed) Q4 results, as posted by Seeking Alpha:
Google, Inc. misses by $0.28, beats on revenue
Google Inc. : Q4 EPS of $12.01 misses by $0.28.
Revenue of $16.86B (+17% Y/Y) beats by $100M.
My eyes immediately gravitated toward the user's comment that declared, "Dividend announced, up we go!"
Digging deeper, I went to Google's Q4 statement:
Google Inc. announced today that its Board of Directors has approved a distribution of shares of the Class C capital stock as a dividend to our stockholders with a dividend record date of March 27, 2014, and a dividend payment date of April 2, 2014.
A Long Time Coming
In Google's torrential daily flood of news, many investors (such as myself) were oblivious to this longstanding development. The idea of the stock price being halved, allowing individuals with lesser means to obtain shares of stock, is attractive and stock prices tend to benefit from the typical stock split.
Now that the news is front and center, many investors have expressed questions and differing opinions in its regard. Such splits are typically spun as being shareholder friendly in that they make an "expensive" stock more accessible to retail investors. Valuation aside, Google's share price (which recently was north of $1,200) is widely considered "expensive" in relation to the typical stock's price tag. In fact, the only reason I can call myself a shareholder is that after an option I held returned 1,000%, I decided GOOG was the place to park the proceeds. Its larger ticket price heavily weighted my previously diversified portfolio.
This halving in theory should make the stock more liquid in both positioning and purchasing for retail investors, but which new share class should they hold (if not both)? And wouldn't a 10-for-1 distribution, such as MasterCard's (NYSE:MA) recent split, be more applicable if liquidity is indeed the intended benefit? Being that Google is already a dual class stock, what are the political motivations for issuing a "non-voting" class of stock?
Questions such as these turned out to be the wrench in Google's initial intentions for the split, which resulted in the aforementioned litigation.
The Split... and a Dividend?
When a company is this big of a cash cow, many would love to pocket some of that tremendous horde. A Google dividend has certainly been called for in the past. The corporate jargon in this case is somewhat, but not entirely, misleading.
As of Dec. 31, 2013, cash, cash equivalents, and marketable securities were $58.72 billion (as stated in the Q4 statement). The dividend, originally announced in April 2012 as noted above, is in actuality more accurately described as a stock split. But dividend hopes up are not up just yet, due to the structure of the legal settlement. If the share classes are valued differently in the open market, distributions may be on the horizon.
The Value of Corporate Control: Will the Dual Classes of the 2-for-1 Stock Split be Equally Valued?
A direct result of the settlement, the structure of the newly issued Class C shares has a pricing mechanism built within it to supposedly compensate for the fact that Classes A and C shares may not trade equally (during its first year of trading). This mechanism has befuddled many, and it is a strange part of a strange settlement. The Class C Shares are entitled to a dividend to compensate their potential discount to the A shares limited to their first year.
In his piece for Deal Book, the "Deal Professor" Steven M. Davidoff eloquently lays out the structure:
The settlement requires Google to pay the following amounts if, one year from the issuance of the Class C shares, the value diverges according to the following formula:
• If the C share price is equal to or more than 1 percent, but less than 2 percent, below the A share price, 20 percent of the difference;
• If the C share price is equal to or more than 2 percent, but less than 3 percent, below the A share price, 40 percent of the difference;
• If the C share price is equal to or more than 3 percent, but less than 4 percent, below the A share price, 60 percent of the difference;
• If the C share price is equal to or more than 4 percent, but less than 5 percent, below the A share price, 80 percent of the difference.
• If the C share price is equal to or more than 5 percent below the A share price, 100 percent of the difference, up to 5 percent.
If you just skimmed through this, the idea is to pay some percentage of the difference in the price of the Class C shares and Class A shares after one year, with the amount capped at a difference of 5 percent.
He goes on to explain how the dividend is in all likelihood hardly to be paid at all! And that it looks most likely that a significant enough discount will only rear its ugly head at the very end of the year, as the market begins to price in the expiration of potential dividend compensation and the discount typically bestowed to non-voting stock.
All Share Classes Are Not Created Equal
Dual share structures' non-voting stock tend to trade at a discount to their voting shares. In a research paper studying various types of dual class share structures involving both differential dividend and voting rights, a discount of 7.7% across the various stock class structures was observed in the 98 dual share class structure companies' stocks they assessed from 1984-99.
The Split's Effect On and Treatment By Indexes and ETFs Currently Holding/Tracking Google Stock
The S&P 500 (NYSEARCA:SPY) was originally set to maintain both Class A and Class C shares, with an eventual rebalancing to the C shares. This would have resulted in the index including 501 shares until the quarterly rebalance, which has historically included the "most liquid" class of multi-class share structures.
They reached out to the public for opinions on the stock split to an interesting conclusion:
S&P DJI expects to transition the S&P 100, S&P 500, S&P MidCap 400, S&P SmallCap 600, and the S&P TMI/CI to a multiple share class structure effective with the September 2015 rebalance.
The S&P Indexes will now track a number of companies as opposed to stock, and they commented:
Multiple share classes are becoming more common among U.S. corporations, especially in the technology sector. Were the trend ignored, some indices would have difficulty properly representing major market segments while providing sufficient liquidity to accommodate trading and necessary index adjustments. The use of multiple share classes is expected to enhance liquidity once the transition is completed. However, turnover may be caused by adjustments to current index constituents which have multiple share classes.
Prior to market open on Monday, June 23, 2014, Google Class A shares will be removed from the Nasdaq OMX Indexes and Google Class C shares will become the sole security representing Google in Nasdaq OMX Indexes.
Indeed, multi-class share structures look here to stay. Increasingly, as companies such as Facebook (NASDAQ:FB) come public they are locking in control via voting mechanisms such as Google's super-voting Class B shares. Shareholders petitioned the move, and so it went to court. The argument is that the solidification of Sergey and Larry's control of the stock vote is a value that should be paid for, and so we had this strange settlement that really didn't address the core issue.
This issue, however, has been longstanding. When coming public with their original dual class structure, the founders commented, "In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google."
Skepticism of Activist Investors: A Slow Death for Stock Democracy?
In an era where activist investors like Carl Icahn and Bill Ackman increasingly become more vocal publicly (e.g., through social media outlets), perhaps their fight(s) will become more symbolic of our American ideals of democracy. Historically given nicknames like "corporate raiders," these activists have recently been shown in a new light as people who will hold managements and companies alike accountable for their practices.
The macro trend of our country, out of the industrial revolution, has been toward the ability of the public to control an interest in the arms of our industries. This ability to hold a small portion of a great American company while possibly collecting an income stream in the form of dividends is now as American as Coca-Cola, baseball, and apple pie. So I watch this trend toward tyrannical corporate control with a great sadness and skepticism. What's more American, after all, than the right of the people to vote?
I will hold the common stock through the split, but will likely sell my Class C shares and move the proceeds into the Class A stock. As Google compensates employees and uses the Class C shares in investment and acquisitions, I expect that the most liquid share class will see dilution and further splits while perpetually trading at a slight discount to voting stock.