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Inside the Google Inc. (NasdaqGS: GOOG) Stock Split

By Chad Fraser on April 17, 2012

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Google Inc. (NasdaqGS: GOOG) reported improved results in the first quarter on Friday, but that news was quickly overshadowed by the company’s new (and controversial) plan to issue a new class of shares.

First, the latest earnings:

In the first quarter of 2012, Google’s sales jumped 24%, to $10.65 billion. Non-GAAP earnings per share (which exclude certain items, such as stock-based compensation to employees) were $10.08, up from $8.08 a year ago. The latest earnings topped the $9.64 a share that Wall Street was expecting.

The price advertisers paid Google Inc. per click fell 12%. But that was offset by a 39% jump in the number of overall clicks.

Google Inc.: New Share Class Is “Effectively a Stock Split”

At the same time, the company announced that it will proceed with what the company’s founders in a letter released last Thursday called “effectively a stock split.”

Since it went public in 2004, Google Inc. has had two share classes. The class A shares, which trade under the symbol GOOG, have one vote each. There are also class B shares, which do not trade publicly and are mostly owned by the company’s founders, Larry Page and Sergey Brin, as well as executive chairman Eric Schmidt. These shares have 10 votes each.

The new class C shares will trade under a different ticker symbol and will have no votes at all. Current shareholders will get one new class C share as a stock dividend for every class A share they hold. That, says Google, more or less adds up to a stock split.

Adding a Third Share Class Keeps Google Inc. Founders in Firm Control

But there is more to it than that. Under the current structure, the company’s founders have 66% of the votes. The new class C shares will let Google Inc. issue new stock without diluting that control.

It will also make it harder for an activist shareholder to buy a large stake in Google Inc. and try to make changes to its board of directors (as Daniel Loeb and Bill Ackman are now trying to do at Yahoo! and Canadian Pacific Railway, respectively.)

So far, investors are unenthusiastic about the new plan. Google’s class A shares have fallen 6.9% since it was announced.

In their latter, Brin and Page acknowledged that there could be opposition to the move:

“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.”

New Google Inc. Shares Could Trade at a Discount

At Forbes.com, Tiernan Ray pointed out that the new shares could trade at a discount to the class A shares. He noted that the Standard & Poor’s 500 index lists both of a company’s share classes, but uses only one for pricing purposes. As the new class C shares have no voting rights, writes Ray:

“It’s conceivable that Google’s class C shares could be passed over by funds that track the index if the class A shares are seen as more representative. If that were to result in a price disparity between the two, it would mean an immediate loss for holders receiving their ‘stock split.’ Instead of this quasi-split, Brin and Page would’ve been better off paying a genuine cash dividend.”

That’s especially so in light of the company’s large—and growing—cash pile. At the end of the latest quarter, Google held cash and short-term investments of $49.3 billion, up from $44.6 billion a year ago.

Will Other Companies Follow Google’s Lead?

The takeaway for investors? As Brin and Page said in their letter, they intended to keep a tight leash on the company from day one, so this new share class doesn’t really change much. And it’s possible that if the class C shares trade at a slight discount, the class A shares will rise slightly to make up for it.

What will be interesting to see is whether, as Steven M. Davidoff writes in the New York Times, other companies’ founders adopt similar measures to consolidate their control. “In other words,” he writes. “The problem with this share issuance may not be Google, but Google’s followers.”

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