Seeking Alpha
Long/short equity, deep value, special situations, contrarian
Profile| Send Message|
( followers)  

Summary

  • Under the new Google share structure, founding shareholders could not be diluted.
  • Dual-share structures leave room for arrogant behavior and underperformance, concluded a Harvard University study.
  • For these and many more reasons in this article, Google now deserves a discount and not a premium.

I have never understood why regulators permit companies to have different class of shares. How is it that a small number of insiders are permitted to exert complete control over listed companies, simply because they can, is beyond me.

Google (NASDAQ:GOOG) has long been one of those companies. And for some strange reason, the market did not seem to care (so far). As of Google's latest proxy filing, four individuals control 62.7% of the total voting power of Google, while holding only 20% of the total outstanding shares of the company.

Google shareholder meetings are no more than a formality. Shareholders can voice objections or make proposals, but their voices are basically dust in the wind. The two founding shareholders, Larry Page and Sergey Brin alone, control 28.1% and 27.6% respectively, or 55.7% of the voting power.

Under the old structure, while the founders of the company still controlled the lion's share of the voting stock power, they were nevertheless diluted just like everyone else, every time Google issued stock for compensation or for buyouts.

Now, the old class A shares will be traded under the ticker GOOGL and the old B class shares under the symbol GOOG. So now Google can issue an unlimited number of shares under the ticker GOOG, but that will in not dilute the founders. That's pretty arrogant if you ask me.

So will the current split in Google's stock benefit shareholders? I think probably not. Here's why:

Shareholder advocates like Carl Icahn are neutralized under this new structure. That might be a reason for Google's stock to trade at lower levels, since the chance of Carl Icahn buying a big block of the company to exert pressure on the board are next to none. Even if Carl Icahn buys 100% of the shares traded under the ticker GOOG, it is the GOOGL shares that make the decisions.

According to a Harvard University study about dual-class common stock structures:

We conclude that the misalignment of incentives in dual-class firms leads to underinvestment and value destruction. Our evidence is consistent with an entrenchment effect of voting control which leads managers to underinvest in growing the firm and an incentive effect of cash flow ownership which induces managers to pursue more aggressive strategies.

And while we do not have evidence of such behavior yet (I mean if you take out the billions Google has spent on non-core business projects), I think we will in due time. Since the founders can never get diluted from now on, I think it is only a matter of time before their brains rise above their heads.

Google is not a cheap stock. Please take note that Google's trailing P/E is about 28 today. And in a general market slide, all widely held stocks get sold, even the cheap ones. However, if I were managing billions and my fund had redemptions, I would sell Google over Apple (NASDAQ:AAPL), hands down, any day of the week.

Large market cap theory. Please recall my article on large-cap stocks (please consider: The 'Too Big Of A Market Cap Stock' Theory). I believe there is a limit to how large of a market cap a company can have irrespective of how fast it grows. I don't know exactly what the limit is, however if you recall when Apple was at the $700 mark, everyone thought it was going to $1500, only for the stock to fall slightly below $400.

Google's market cap today is about $360 billion. That is a very big number and if I am right, the following will happen: Google's profits will keep growing, but its stock will go nowhere. After several quarters or years, Google's P/E will fall by much compared to today, even if the company's fundamentals are much better than today. In a nutshell, that's what has happened to Apple.

Finally, this arrogant behavior simply deserves a discount. I don't care how smart these guys are. The U.S. is a country founded on individual rights and those rights have been tampered with. I honestly think U.S. legislatures should enact a law that prohibits dual class structures and force all publicly-traded dual class stock schemes into a single class of stock today, with equal voting rights. Enough is enough.

Source: Short Google, Because Arrogant Behavior Has Its Limits