Facebook Shareholders Just Punished Themselves

| About: Facebook (FB)

Summary

Shareholders approve Class C non-voting shares.

Likely to create gap between trading classes.

This is a losing scenario for many involved.

Back in early May, I detailed my biggest worry when it came to Facebook's (NASDAQ:FB) proposal to create a new class of stock ("Class C") that will not contain voting rights. As we've seen before, a gap usually ends up forming between trading classes, so investors can lose in a number of ways. Facebook shareholders have now approved this new voting class, which effectively means investors are punishing themselves.

Facebook CEO Mark Zuckerberg will most likely sell these Class C shares, raising money to use for personal items as well as his generous charitable efforts. This new structure will also allow him to retain his power through Class A and B shares longer, as Facebook can use the non-voting shares to pay for acquisitions, employee compensation, etc.

Facebook is not the first company to issue a new trading class. We saw Google/Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) go this route in recent years. In that case, Alphabet's Class A shares that contained voting rights ended trading up at a decent premium even after Class C non-voting shareholders were compensated from a prior lawsuit. Eventually, management started buying back Class C shares, but as of Monday, Alphabet Class A still trades at a more than $12 premium.

Just over two months ago, I warned investors again when Under Armour (NYSE:UA) (NYSE:UA.C) launched its new trading class. Just as I suspected, a gap opened between the two classes of shares, and it has grown rather large. In the chart below, you can see how the voting shares have done considerably better.

Click to enlarge

(Source: Google Finance)

Under Armour's Class A shares finished Monday at a nearly 10% premium to their Class C counterparts, a huge difference for just a few months. Recently, Under Armour announced a Class C dividend to compensate holders of that class, but compared to the discount shares are trading at, investors will get very little. It is unclear at this point what Facebook will eventually do, especially if we see similar lawsuits as the two other names detailed above.

With Facebook shareholders approving a new trading class of non-voting shares, they have essentially punished themselves. Those that hold the new Class C shares are likely to end up losing when the shares trade at a discount, as we've seen with Google/Alphabet and Under Armour. On the other hand, those deciding to sell shares before the split and re-buy Class A afterwards could likely face a huge tax bill they don't want this year if they are sitting on large gains from Facebook's huge rally in recent years. As always, I will recommend the best trade for those wanting to be long Facebook is stick with Class A.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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