Watching Google (GOOG) trade coming off of the past weekend, a bypassing spectator would be prone to believe the company suffered a significant blow as Google's stock dropped 8% to close at $609.57 as of April 17. Indeed, it appears almost strange to think that the company actually announced an increase in net income 60% over the year prior.
Revenues experienced a 24% growth year over year as seen in the recent earnings release. But instead of a positive reaction, the market became fixated on the unique 2:1 stock split proposal by upper management that effectively solidifies control for the founders.
The concept is simple. The stock split will be handled via a stock dividend to all existing shareholders. With two classes of shares (one with voting power and one without) the company can use the shares without voting power to award stock compensation, levy an acquisition, raise capital, or use it for other general corporate purposes. However, the shares with voting power will not change nor will they be diluted in regards to their effective vote.
In a move that will essentially freeze the current power structure, the proposed 2 for 1 stock split allows for effective long-term planning. By conjuring up this atypical maneuver, the founders of the company diminish the ability for an outsider to buy up a meaningful portion of the company's vote to sway the direction of the company. As it stands, 66% of the current voting power belongs collectively to co-founder Larry Page, co-founder Sergey Brin, and chairman Eric Schmidt. It is also for this very reason that it is presumed that the stock split proposal will easily pass once formally put up for vote.
Several analysts were quick to knock the company, citing that the stock split was a power grab that stole the vote away from shareholders. As a result, many investors were quick to believe that stock split was essentially dilutive to their own voting power. Yet let it be stated for the record in a simplistically bold manner: The stock split does not change a current investor's current voting power.
Investors today will have the same amount of voting power the day after the stock split as they do in the present as long as they hold onto the class of shares with voting power. Will the two classes of shares trade at the same value? Likely "no". Will the value of the two combined shares be equivalent to one share trading today? "Yes."
Beneficially, the stock split actually allows for two positive implications for current investors:
- Psychological "Cheap Stock" Effect. Investors who may not have been wiling to buy shares at a $600+ price tag may be more inclined to do so at a sub-$300 level. Irregardless that a split has no real effect on the value of a company, there is undoubtedly a real-world benefit to having a more inexpensive share price when it comes to the stock's face value. Considering that much of the world appears to still be wrapping its head around the concept of market capitalization, conducting a maneuver that essentially appeals to a broader audience is good for introducing additional investment into the company.
- Stabilized Voting Power. As the amount of shares continue to increase over time (as is the normal course of business for publicly traded companies), the shares structure that accounts for the voting power will stay the same. Therefore, additional shares which would normally have attached voting rights will no longer have the effect of dilution when it comes to voting power for current investors. In effect, this actually serves as a pro when it comes to supporting value for these shares. While the investment base will ideally tend to grow through an expanding voteless share structure, shares with voting power actually become more scarce over time thereby adding an additional (albeit minute) value proposition.
All things considered, apart from a falling share price, has anything truly changed for investors in these past few days? Not really. Google released earnings that beat expectations, the company increased its flexibility, the centralized power never changed, and investors are ultimately provided with an incentive to be long through the stock split. Yet despite all of this, the company still took a hit on the chin when it came to the stock price.
It's clear that investors dislike uncertainty, and the contrasting opinions on whether the stock split was good or bad for investors actually had the very real effect of hurting the company when it comes to market value. From $660/sh. down to $610/sh., Google essentially lost $16.5 billion in market value over these last two days when using the diluted amount of 330,136,000 of shares outstanding. Perhaps it's now time for investors to consider if the news truly justified financial impact to the company.
Disclosure: I am long GOOG.