Last week, Google (Nasdaq: GOOG) announced a 2-for-1 stock split that creates an additional class of non-voting capital stock. Basically, the new shares will be doled out as a stock dividend to all existing shareholders, doubling their holdings.
Certain members of the media took this announcement as an occasion to drum up controversy, warning that the stock split is nothing less than insidious and that shareholders are going to end up regretting it.
Andrew Ross Sorkin of The New York Times, for instance, speculates that “while leaving control with Google’s founders might be fine right now, there will very likely come a day when its shareholders will regret not blinking at what could be called ‘anti-good corporate governance.’”
What Sorkin and those like him are worried about is power – i.e. who has it, who doesn’t and how much.
As Felix Salmon of Reuters, in an article unambiguously titled “Google’s Evil Stock Split,” puts it, “It’s basically a way for Google to try to retreat back into its pre-IPO shell as much as possible.” In other words, by keeping power out of the hands of shareholders, it can pretend that the shareholders don’t exist – just like in the good old days before its IPO.
And quoted in Reuters, BGC analyst, Colin Gillis, says, “This stock-split dividend, a dividend of non-voting shares, is really just so the company can maintain control.”
I have no argument with the basic premise that the move is about maintaining control (and as I’ll show, neither does Google).
But beyond the bare facts, Sorkin and Salmon have it all wrong. The stock split’s not evil. In fact, it’s pretty much meaningless…
Google’s Benevolent… or Evil Dictators for Life
The stock split is meaningless because it’s just another manifestation of the way things have always been at Google.
For instance, Salmon, like many others, frames the move as a blatant grab for power by the heads at Google. But he forgets that the founders were explicit from the very beginning that they were the ones that were going to run the show, and that shareholders should be absolutely aware of that before buying any equity.
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In Google’s own “2004 Founders’ IPO Letter,” Larry Page offers a self-characterization of the three executives, laying down the law when he does so, stating, “We run Google as a triumvirate.”
That was eight years ago. Old news, to say the least.
So the idea that these non-voting shares suddenly make Page, Brin and Schmidt dictators flies right in the face of the historical record. They’ve always been the ones in power. They said it themselves.
What’s more, when Sorkin, in his New York Times story, points out that “so far, shareholders, oddly, don’t seem to be too upset,” he would have done himself (and his readers) a favor to ask: “Why not, exactly?”
It’s simple, really: They never expected to have any corporate power to begin with, as Google’s gone out of its way to tell them not to…
The “2012 Founders’ Letter” which was issued to explain the stock split to shareholders, opens by quoting at length the “2004 Founders’ IPO Letter.” The brunt of its message is summed up in these two lines:
“We are creating a corporate structure that is designed for stability over long time horizons. 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 main effect of this structure is likely to leave our team, especially Sergey and me, with increasingly significant control over the company’s decisions and fate, as Google shares change hands…”
This corporate philosophy that Google presented from day one in its “Owners Manual for Google Shareholders” (the subtitle of the IPO letter) is, “Give us your money and leave the rest to us.”
The stock split is designed simply and clearly to make sure that the long-standing corporate structure – and Google’s “shareholder treatment” – continues exactly along the same path that it always has:
“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.”
Of course, in the end, keeping the power in the hands of the founders may or may not be in the best interest of anyone. Google could bet on the wrong horse (Google+?) or the right one (Android?). But the fact that Google insiders are calling the shots – and not shareholders – is certainly nothing new. It’s worked out pretty well so far, hasn’t it?