Google’s Stock Split: Not Evil, Just Smart
“Don’t be evil,” Google (NASDAQ:GOOG) wrote in its S-1 prospectus for its initial public offering in 2004. “We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company.”
This comment — a commitment, really, on the part of Google — has been resurrected by market watchers recently in light of a forthcoming stock split. Beginning April 3, Google will “create a new class of non-voting capital stock, which will be listed on NASDAQ. These shares will be distributed via a stock dividend to all existing stockholders: the owner of each existing share will receive one new share of the non-voting stock, giving investors twice the number of shares they had before.
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“It’s effectively a two-for-one stock split-something many of our investors have long asked us for. These non-voting shares will be available for corporate uses, like equity-based employee compensation, that might otherwise dilute our governance structure.”
If this split seems a little funky to you, you’re not alone. Investors and the media have both gone nuts with everything from misinterpretations to outright disagreement with the plan. Here’s why: the split will solidify the voting authority of founders Sergey Brin and Larry Page and former CEO and current Chairman Eric Schmidt, and people disagree about whether this is a good thing.
Brin, Page, and Schmidt have long held a controlling or near-controlling share of voting power at Google, a luxury granted to them by a dual-class stock architecture. The three own Class B shares, which wield 10 times the voting power of class A stock, which is what traded on the public markets until April 3 under the ticker GOOG. Post-split, these shares will trade under the ticker GOOGL, while the new, non-voting Class C stock will take over the GOOG ticker.
Google’s founders were careful to explain and argue in favor of the dual-class scheme in 2004, as the company was preparing to go public. “We are creating a corporate structure that is designed for stability over long time horizons,” Brin and Page wrote in an open letter to prospective shareholders in 2004. “By investing in Google, you are placing an unusual long term bet on the team, especially Sergey and me, and on our innovative approach.”
The deal was this: Google wanted to open its doors to all of the benefits of public ownership without jeopardizing the authority of its core principals — Brin, Page, Schmidt, and a handful of other key executives and directors — over the company’s direction and strategy.
“After the IPO,” Page wrote, “Sergey, Eric and I will control 37.6 percent of the voting power of Google, and the executive management team and directors as a group will control 61.4 percent of the voting power. New investors will fully share in Google’s long-term economic future, but will have little ability to influence its strategic decisions through their voting rights.”
The stock split will, ostensibly, do little to change the power structure at Google, and serve primarily to preserve the voting power of those currently in charge. The voting authority of Google’s principals has been diluted through years of stock-based compensation and acquisitions. If the company’s leadership didn’t do something — like issue non-voting stock — their grip over the company would gradually loosen.
This may sound like a somewhat contrived way for executives to maintain control of the company, and it kind of is, but this is fine. A bet on Google has always been a bet on Brin, Page, and Schmidt. They’ve argued that from from the beginning, and it’s worked out well so far. The stock split is a mechanism to preserve what’s worked for years at one of the world’s greatest Internet and technology companies.