Google (GOOG) announced a brazen power grab to its investors Friday morning. The tech firm plans to double its number of outstanding shares through a 2:1 split. However, rather than hand owners identical shares, the company decided to create a new class of shares that lack voting rights. In a statement released Friday, Google's co-founders Larry Page and Sergey Brin had this to say about the plan's detractors:
"We recognize that some people, particularly those who opposed this structure at the start, won't support this change - and we understand that other companies have been very successful with more traditional governance models. But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users. Having the flexibility to use stock without diluting our structure will help ensure we are set up for success for decades to come."
The statement should have read: "We, Larry Page and Sergey Brin, know better than our investors and can't be bothered with their opinions." Prior to the new plan the duo controlled 56.7% of the company. This announcement further entrenches the two as the sole leaders of Google's future.
This move is a lose-lose-lose for "main street" investors. The shares which have voting rights, termed class A in the new structure, will lose value due to the dilution of their voting power. The new shares non-voting shares, termed class C, will trade at a steep discount to class A shares. Without voting rights, these shares will be even less valuable than the class A shares. Finally, Google's shareholders will not receive a permanent dividend, even though the company is sitting on a $50 billion hoard of cash and treasuries.
Investors were clearly unhappy following the announcement Friday. The company fell from $650 per share to $625, a 4% loss. Some may argue this was just technical correction; however I believe shareholders understand the immediate fundamental loss in value their shares suffered from this move and are bailing out.
In other Google news, the firm received approval in February to purchase Motorola Mobility (MMI). Don't expect this deal to boost Google's price when it is finalized. Google is not buying Motorola for its business, which managed to lose $249 million last year. Instead, the search giant wants Motorola's mobile device patents to protect its Android platform from various lawsuits from the likes of Oracle (ORCL) and Apple (AAPL). Google is hoping the respite from lawsuits will give it time to grow a solid app ecosystem, seen as key to smartphone platform's future. The tradeoff for this security is the money Google will have to spend money to spin down Motorola's unprofitable business activities, something certain to weigh on its share price.
Google stock is headed southward, in my opinion. Diluting the value of investor holdings was the wrong move and the Motorola acquisition, while necessary, does not bode well for its price either. The purchase was defensive and will not generate revenue on its own; rather it will just protect revenue that already exists. Cut this name loose and look for greener pastures.
Those greener pastures might have a dash of blue to them, Big Blue that is. IBM (IBM) is giant of innovation and a wonderful generator of shareholder wealth. The company that brought us hard drives, ATMs, and bar codes is now changing the information technology landscape with state-of-the-art hardware and software, including supercomputers and artificial intelligence that rivals its organic counterpart.
Meet Watson, a computer that can sort through the equivalent of one million books of information per second and which is capable of learning. Though the cash award it received during its Jeopardy! victory over Ken Jennings and Brad Rutter was donated to charity, the progress represented by the technology could be a huge boon for IBM. Question answering computers, such as Watson and its DeepQA AI , have potential applications in medical diagnosis, corporate decision-making, and legal research roles.
IBM announced its purchase of Varicent Friday as part of an aggressive expansion into the business analytics market. Business analytics software, such as that provided by Varicent, measures sales performance and payroll within companies and assists in making decisions based on these figures. IBM's business analytics segment 16% last year and is expected to reach $16 billion in revenue by 2015. Business analytics software is expensive and complex to produce. This represents a sizable barrier-to-entry and as such there is little competition in the market. It offers high margins to companies that can break into the game.
IBM trades at $203 per share. It offers a $3.00 per share dividend yielding 1.50% and has not missed a dividend payment since it began trading in 1962. It has consistently increased the dividend amount paid since 1993. The company has earnings per share of $13.06, so there's plenty of room for growth. The company releases earnings Tuesday after the closing bell and the consensus is that IBM will beat expectations. Buy it now before it pops.
Sure, Google and IBM are both on the cutting-edge of the Information Age, but IBM offers a better potential to profit from the rapid evolution of technology. Lawsuits have cornered Google into acquiring an unprofitable company to save itself from legal threats and the executives have thrown investors under the bus for the benefit of the founders. An unequivocal loss of value will result from the moves and the share price will fall to represent this. Make the move to IBM, a rock-solid company with a record over the past half-century of generating ideas for the world and profits for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.