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Google’s Non-Split Stock Split
The key aspect of Google’s earnings yesterday was the don’t-call-it-a-stock-split stock split. I say “don’t-call-it-a-stock-split” because it technically wasn’t one, but it was effectively one. There will now be double the number of Google shares outstanding. It’s just that the shares won’t all be equal. Half of them will be of a different type of class, which is important when it comes to company governance. Those shares will carry no voting power.
I’m not going to pretend to understand all of the intricacies here. But I think Felix Salmon has the most interesting take on the news. He flat-out calls the maneuver evil.
He notes that for much of the 20th century, dual-class voting shares were illegal. And even when they came back in 1986, the idea was to have protections in place. The majority of independent shareholders (so, non-management and non-directors) were supposed to approve such a move.
But Google didn’t see to that. Instead, they appointed a small committee of independent directors (so, just those that don’t actually work at Google) to make the call on the proposal. And because that committee approved it, it will now go before all the shareholders for a vote in June. And, notably, that vote will include Google’s management.
As Google itself notes:
Given that Larry, Sergey, and Eric control the majority of voting power and support this proposal, we expect it to pass.
No shit.
And it’s worth noting that it still took Google’s own self-appointed committee of their own board members 15 months to make that call on this proposal.
Why did it take so long? Probably because they knew the decision would be controversial. And why is it controversial? Because it perverts the intent of the concept to the point that it’s still not clear that Google should be doing it.
So why bother with all of this and risk looking bad as a result? Because Google’s management wants to have their cake and eat it too. They want to be able to bring in new recruits and retain top employees with the glittering lure of stock options. But they want to issue them without diluting their own shares, and as such, their control of the company.
But as Salmon notes:
It’s worth putting this theoretical fear in perspective. Common shareholders currently have just 32.6% of the voting stock at Google, with Larry and Sergei Sergey between them controlling 57.7%. If Google doubled the number of common shares outstanding, the Troika still wouldn’t lose control. And in any case, as Steve Jobs has shown, you don’t need control of the stock to have complete control of the company.
The majority of Steve Jobs’ wealth did not come from Apple stock. It came from Disney stock, which he got after the sale of Pixar. Jobs actually owned a relatively small percentage of Apple when compared to other company founders. (Which is because he sold all but one share when he was booted from the company in the 80s and was only granted new options over time when he came back.) Despite this relatively “weak” position, Jobs was clearly in full control of Apple.
But the Google guys must be looking at Facebook about to go public and seeing how much control Mark Zuckerberg will retain even after the IPO. He planned better. With seemingly every move Google makes now increasingly criticized from the outside, the thought of losing control of the company must scare the crap out of everyone there.
I think that fear is fair. And I think Google will be in a better position to avoid the pitfalls that larger companies often fall into if the founders can retain voting control. Not everyone is Steve Jobs.
The problem is the way Google is ensuring that the founders maintain this control. It sure seems shady, if not exactly “evil”.
But perhaps that’s appropriate given many of Google’s maneuvers over the past few years. The refrain is often the same. Shady, if not exactly “evil”.
Notes