Google Stock Split? Pros vs. Cons

I just have a quick question; I saw Google's stock price is up in the $900 range, and got curious: why would they not do a stock split?

Their p/e ratio is like 27, wouldn't doing a stock split make the shares more affordable, thus creating higher demand, and driving up the price per share? Seems like a no brainer to increase market cap, are there cons to a stock split that I'm unaware of?

 

Why don't you read about what a stock split actually is?

http://en.wikipedia.org/wiki/Stock_split

"A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur"

If GOOG made a stock split 2:1, the price is reduced by 1/2, but EPS is also reduced by 1/2 b/c the number of shares increases by two times. Meaning, there would be no change in market cap or P/E.

The entire purpose of a stock split is to provide more access to retail investors (which some companies don't want - see WaPo, Berkshire, etc.). It's purely a behavioral finance move, not something that changes the fundamentals of the company or stock.

 

I understand that from a technical standpoint it wouldn't change the market cap/p-e, but what I'm saying is, inherently, wouldn't it make the stock more accessible to the average investor, who may have limited funds? I feel like people want to buy stock in a company as strong as Google, but some are unable to because of the high stock price. If the price was cut in half, more regular investors would be interested in the stock, thus increasing demand, and thus increasing the new proportional (i.e. unchanged) share price.

I understand that when you split stock it doesn't change your market cap. I'm just saying that it seems like you would want your shares accessible to as many people as possible, and a share price of $900+ has low accessibility to an average (i.e. non-wealthy) investor.

 

No, that is not what you asked. You clearly edited your post. I wouldn't have said "The entire purpose of a stock split is to provide more access to retail investors (which some companies don't want - see WaPo, Berkshire, etc.). It's purely a behavioral finance move, not something that changes the fundamentals of the company or stock." if you didn't fail to understand the question to begin with.

You didn't even understand how a stock split works. Your follow-up post is nothing but regurgitation of exactly what I just said.

 

Google stock has been one of the best performing in history. Since the company’s initial public offering in 2005, share have surged over 1,200%. A $1,000 investment in GOOG stock would be worth over $12,000 today.Yet, GOOG stock’s valuation is not that high. Trading at $680.04 per share, Google stock has a price-to-earnings multiple of 27.67X. If you use its expected earnings for the next calendar year, you’d see that the company is trading just above 17 times its forward earnings. If things turn to be the same there will be some one to take over for GOOG Stock.

 

Excellent post.

As Addinator37 pointed out in a previous post on this topic (with which I agree):

"As far as being long or short, I have stayed away from Google personally because I can't seem to gauge where they are going in the future. Google + doens't excite me at all. They are simply giving away android (which makes perfect sense to gain market share) but I have a feeling eventually hardware makers will look towards other OS's as well. I get the sense that Google is a company that had so much success so quickly that it feels it can do absolutely anything. It tried to buy youtube and has really failed to monetize it and now it has bought Motorola Mobility to do.. what? Take hardware that is already declining in market share and throw an operating system which is already available on tons of other vendor's phones which are preferred over motorola phones. I just don't see it. Besides, does Google actually want to make both hardware and software? I think they are a better design and search company. I simply think that they lack the focus they had when Eric Schmidt was CEO."

I think that they are going to roll out some future plans that are going to be wildly unpopular.

Also, could you elaborate on the technical details of the stock split? Reading various articles, I'm getting the impression that the current ownership structure is going to remain unchanged (i.e. those who already have voting shares still have them, but will also have an additional non-voting share). Is this a way for Google to maintian constant ownership, when current employees exercise vested options? Does this imply that current employees will no longer have a voting say in their company in the future?

 
tellmewhatyouwant:
Wait, is this really the Aswath Damodaran of Stern? You should be certified immediately. Why are you on WSO?
He gave us permission to syndicate his content onto WSO. We'd love it if he participated in the discussion as well, but for now we're just posting content from his blog
WSO Content & Social Media. Follow us: Linkedin, IG, Facebook, Twitter.
 

wow, Damodaran....kinda feel like a teenage girl at a boyband concert right now! These are exactly the kinda posts WSO needs more of.

You know you've been working too hard when you stop dreaming about bottles of champagne and hordes of naked women, and start dreaming about conditional formatting and circular references.
 

Eddie, did any of the companies you ever worked with in your past career (when you did IPOs, secondary offerings, etc) ever do anything like changing the symbol to hide a devaluation?

Metal. Music. Life. www.headofmetal.com
 

There was always a bunch of tomfoolery surrounding the issuance of warrants back then. So you'd have this half-sketchy company that would issue a bunch of warrants to raise more money (or to sweeten an offering) and they'd end up having their stock symbol (XLIC is one that springs immediately to mind) and then just a trainload of warrant symbols (XLICW, XLICX, XLICY, etc...) attached to it.

 

Obviously a reverse stock split is the type that makes investors run away (think Citi a few years back), but this one would also give me some pause. As for the type of investor that I am, I wouldn't own enough in any company (much less one at Google's price per share) to have an issue more or less with a change in my voting rights. However, what do you guys think the big funds that own large blocks of GOOG are going to think with their voting rights cut in half? I would be concerned that other companies may follow suit. To me, this erodes potential confidence in management. An unchecked CEO or board can erode a company's value quickly. (Calling Aubrey McClendon) On a fundamental basis, the value is unchanged, but hypothetically it kind of is devalued in this instance. A share is not only ownership in the company, it is also a right to a "say" in the way the company carries itself.

"Decide what to be and go be it." - The Avett Brothers
 

I wonder if there will be a significant price differential between Class A and Class C shares.

Given that the founders control over 2/3 of the company through Class B shares, I'd imagine not really.

Always looking to learn something new.
 

Awesome writeup Eddie. I love these kind of articles and think they're extremely useful for the WSO crowd.

I saw a comment the other day that said this split took shareholders with almost no power and gave them less. Normally, C shares should trade at a discount to A shares, but given that A's don't really have any power in Google I'm not sure that matters here.

Either way, the only way I own GOOG (or soon to be GOOGL) is through a tech focus ETF, so I'm not really concerned about my exposure.

twitter: @CorpFin_Guy
 

Probably not, actually (though theoretically they should). This is speculation on my part (but I think it's probably spot on): they'll open them both at the same price and then let the market take over from there. At that point you'll probably see the A shares trade at a slight premium to the C shares, but probably not as big a premium as you might think due to

  1. the fact that even A Shares have only nominal voting rights that have no impact on the way the company is run and
  2. Google's sleight of hand in giving the new C Shares the GOOG stock symbol which has been the company's ticker symbol since day one.

It's impossible for me to believe that the company didn't think that second scenario through completely, so it has to be strategic. If it works and they're right, the C Shares won't trade at much of a discount.

 

I didn't ask, but what % of GOOG is held by insiders? With a company like FB, where Zuckerberg owns 57%, voting rights don't matter (which is reason number one of about 10 that explains why I won't be risking any $$$ to buy their stock). No matter what, it's an attempt to erode the power of shareholders over management, which should drive class C down. I would be interested to see if that creates a premium on Class A, which would be stupid. Imagine that: You start one day with X number of shares that have voting rights attached to it. The next day, a split happens and half of your voting rights are eliminated. The caveat is that if there is such a parity between class A and C that you might possibly come out ahead, you can sell your shares and have a little profit. Example - $1200/share before, $610 for Class A because of voting rights, $595 for class C because of the lack thereof after the split. The final question to be answered is what type of value will the market place of voting rights at GOOG. Since they don't have as high of cash/share % as AAPL, the market might not have great expectations for institutional investors to have a say so with management. It still is a Sleight of hand situation though, as you pointed out, to give the class C GOOG. It's not the real thing.

"Decide what to be and go be it." - The Avett Brothers
 

Does this really dilute shareholders voting rights? The split just impacts the dollar value of each share and creates an additional class of non-voting shares, but after the split any shareholder will still have the same percentage of shares with voting rights.

I realize all this is moot since, as pointed out by PolTech, the founders have majority control through their Class B shares, but I'm just wondering if this really represents a dilution of voting rights. Am I missing something?

 

@"wareagle4230" Just about all the major tech companies these days have "super" shares that only the founders own and ostensibly block investors from ever having anything to do with the operations of the company. It's not just Google, but Facebook, Apple, Zynga, the list goes on and on. Investors hold absolutely no sway over management in these companies.

In fact, Google kinda set the trend for this back at their IPO when the founders got B Shares that gave them 10 votes per share, but that's not even considered a lot these days. Mark Pincus has founders stock in Zynga that gives him 70 votes per share. The tech world doesn't like being beholden to investors, and I think that's what frustrates a lot of the big players. Apple is prime example. Look how much Icahn had to bitch and for how long before Apple threw him what amounts to a little bone with their buyback. These Silicon Valley guys don't give a shit about Wall Street, and we basically have to suck their kneecaps because they're the cool kids these days.

 

I knew about Pincus having the voting shares like you said, but I haven't researched enough tech companies to know that each one had a similar situation. I understand the founders' needs to have freedom to create and build their product/brand, but I'm not too keen on investing in a company that can pretty much do as they please without any checks and balances. Take Zuckerberg as an example. I'm sure that he has great vision of making Facebook and anything associated with it into one of the best creations of the last 50 years. However, I don't think that he particularly cares about how it affects shareholders, or cares about what Wall Street thinks. As long as he doesn't run the risk of being pushed out by the activist shareholders, or by all of the shareholders coming together with a majority vote, he doesn't care what the stock does. He has the capital he needs to do what he wants. As for his net worth being tied up in it, a drop in price might lose him millions, but he'll still have billions. That is why I steer clear of most companies that don't have sufficient checks and balances in place. Just my style I guess. Great article though, very glad that you posted it!

"Decide what to be and go be it." - The Avett Brothers
 

@"Jawboneofa" Yes it does, in a pretty real sense. If it were a straight 2:1 split, then there would in the period of one trading session be twice the number of potential votes against management available in the market than existed the day before. By doing it this way they can double the number of shares, cut the share price in half, yet avoid facing any increase in shareholder power.

Here's a pretty good explanation:

http://dealbook.nytimes.com/2012/04/13/new-share-class-gives-google-fou…

 
Edmundo Braverman:

@Jawboneofa Yes it does, in a pretty real sense. If it were a straight 2:1 split, then there would in the period of one trading session be twice the number of potential votes against management available in the market than existed the day before. By doing it this way they can double the number of shares, cut the share price in half, yet avoid facing any increase in shareholder power.

Here's a pretty good explanation:

http://dealbook.nytimes.com/2012/04/13/new-share-c...

Sorry, I still don't get how it dilutes voting power. The way I understand it: Today it costs $1200 to buy one of X many votes Post-Split it costs $600 to buy one of X many votes X doesn't change.

It is a potential increase in voting power as an investor could sell their class C and for only a slight premium buy a class A and have twice as much voting power post-split as pre-split, for (about) the same amount of money.

What am I missing?

 

Nice article Edmundo!

My expectations are nearly the same as yours. For most of the "small invetors" the voting rights don't really matter, although, that's is something I assume. Lots of investors just want to make money and don't care really much about voting rights. So actually, I think it's a very smart action of Google. They protect their ownership, without destorying much, if any, value. Really looking forward to what is going to happing after these stock split. Just correct me if I am wrong, but the voting percentages stay actually the same as they are no right? The only thing that changes is that everyone with stocks receives 2:1, so they only keep 1 with voting rights. However, their % of the total voting rights does not change?

Very interesting to follow this!

 

Funny, just found these posts from almost exactly two years ago:

http://www.wallstreetoasis.com/forums/googles-unusual-stock-split http://www.wallstreetoasis.com/blog/google-splits-its-stock-and-spits-o…

It's the same modus operandi - the new shares didn't carry any voting rights. Seems like Google is stripping more and more voting rights from the other shareholders and concentrating them in the hands of the founders by doing a split every few years.

Move along, nothing to see here.
 

I'm with you LongandShortofit. The creation of the new Class C shares prevents the voting rights of Class A shareholders from growing, so it could be seen as a dilution if we compared it against a straight 2:1 split. However, the number (and percentage) of votes held by Class A shareholders relative to the total number of votes will not change from Wednesday to Thursday as far as I can tell.

 

As far as I can tell, I agree that the number of votes doesn't change. However, as edmundo pointed out earlier, the dealbook article in the NY Times spells it out better. Management still stands to benefit and gain better control in the long term.

"Decide what to be and go be it." - The Avett Brothers
 

Regardless of the voting rights, I do think that it begs to readdress the argument of whether or not a stock split is ever necessary. Buffett obviously says no, and other than a play by management to have an effect on voting rights or something else due to it, it doesn't change the intrinsic value of a company. I know that often it can be used to create a price that might be used to gain entrants into the market, but that seems like an unnecessary motive. One of the splits that I followed was CSX's 3:1 split a few years back. Their stock price went from around $75 to $25. I read an article on street.com (never been a fan of Cramer) that was calling CSX a buy due to the fact that their current price around $26 was well below the $78 at the top of their 52-week range. Talk about not doing your homework. Makes me wonder how many dopes bought based on that incredible "analysis"...

"Decide what to be and go be it." - The Avett Brothers
 

Ok, here is the way that I understand it with an example. Company ABC is worth $100 (market cap). That value is distributed over 20 shares of stock. 10 shares are class A with one vote each totalling 10 votes, and $50 in market value. 10 shares are class B with 10 votes each and $50 in market value. Company ABC splits all Class A shares in a 2:1 forward stock split like Google. The combined value of both class A and class C (newly created) is still $50 total. However, since class A only has votes now, 1/4 of the value of the company (class C) doesn't have a vote. The votes are still there as 10 votes for class A holders, and 100 votes for class B holders. The difference is that if an investor valued voting privileges, the only way to gain voting rights is to buy shares in Class A. The split doesn't change the amounts of votes outstanding, but it does create a situation in which the portion of the company that can be purchased to gain votes goes down. An activist investor can buy $10 million of Google's market cap after the split, but only gets 50% of the voting rights that he/she could have acquired prior to the split if they buy both from Class A and Class C. This also would create the situation that was discussed before about premium vs. discount between Class A and C shares. I hope that is correct and makes sense. @"Edmundo Braverman" - Am I explaining that correctly?

"Decide what to be and go be it." - The Avett Brothers
 
wareagle4230:

Ok, here is the way that I understand it with an example. Company ABC is worth $100 (market cap). That value is distributed over 20 shares of stock. 10 shares are class A with one vote each totalling 10 votes, and $50 in market value. 10 shares are class B with 10 votes each and $50 in market value. Company ABC splits all Class A shares in a 2:1 forward stock split like Google. The combined value of both class A and class C (newly created) is still $50 total. However, since class A only has votes now, 1/4 of the value of the company (class C) doesn't have a vote. The votes are still there as 10 votes for class A holders, and 100 votes for class B holders. The difference is that if an investor valued voting privileges, the only way to gain voting rights is to buy shares in Class A. The split doesn't change the amounts of votes outstanding, but it does create a situation in which the portion of the company that can be purchased to gain votes goes down. An activist investor can buy $10 million of Google's market cap after the split, but only gets 50% of the voting rights that he/she could have acquired prior to the split if they buy both from Class A and Class C. This also would create the situation that was discussed before about premium vs. discount between Class A and C shares. I hope that is correct and makes sense. @Edmundo Braverman - Am I explaining that correctly?

But if the activist investor only buys class A, they can buy twice as much voting power as before, for the same amount of money, or a slight premium. They can concentrate all of their buying power in the voting shares and get more voting power per dollar spent.

 

I'm guessing all the institutional traders are wise to this and will just shift to purchasing GOOGL in the future for their clients?

"Everybody needs money. That's why they call it money." - Mickey Bergman - Heist (2001)
 

One other thing that is important to note about this is that Google will never again issue voting stock. In other words, any stock issued from this point forward will all be Class C non-voting shares (the GOOG shares). Any acquisitions they perform, etc... will all be done with Class C shares. Here's a really good run-down on what's going to happen written by the NASDAQ:

http://nasdaqtrader.com/content/GOOGfaqs.pdf

 

Quick Breakdown of the stock:

Class B shares have 10 votes a piece (They don't trade, mainly held by the two founders)

Class A have 1 vote per share. This was the stock that traded before this anouncement.

Class C, the new shares created, carry 0 voting rights at all. They really aren't substantially different because no one could really acquire enough rights anyway even if they accumulated tons of class A stock.

Frankly, I think problems with the Motorola acquisition are more material than this 'split'. As far as being long or short, I have stayed away from Google personally because I can't seem to gauge where they are going in the future. Google + doens't excite me at all. They are simply giving away android (which makes perfect sense to gain market share) but I have a feeling eventually hardware makers will look towards other OS's as well. I get the sense that Google is a company that had so much success so quickly that it feels it can do absolutely anything. It tried to buy youtube and has really failed to monetize it and now it has bought Motorola Mobility to do.. what? Take hardware that is already declining in market share and throw an operating system which is already available on tons of other vendor's phones which are preferred over motorola phones. I just don't see it. Besides, does Google actually want to make both hardware and software? I think they are a better design and search company. I simply think that they lack the focus they had when Eric Schmidt was CEO.

 
Addinator37:
Quick Breakdown of the stock:

Class B shares have 10 votes a piece (They don't trade, mainly held by the two founders)

Class A have 1 vote per share. This was the stock that traded before this anouncement.

Class C, the new shares created, carry 0 voting rights at all. They really aren't substantially different because no one could really acquire enough rights anyway even if they accumulated tons of class A stock.

Frankly, I think problems with the Motorola acquisition are more material than this 'split'. As far as being long or short, I have stayed away from Google personally because I can't seem to gauge where they are going in the future. Google + doens't excite me at all. They are simply giving away android (which makes perfect sense to gain market share) but I have a feeling eventually hardware makers will look towards other OS's as well. I get the sense that Google is a company that had so much success so quickly that it feels it can do absolutely anything. It tried to buy youtube and has really failed to monetize it and now it has bought Motorola Mobility to do.. what? Take hardware that is already declining in market share and throw an operating system which is already available on tons of other vendor's phones which are preferred over motorola phones. I just don't see it. Besides, does Google actually want to make both hardware and software? I think they are a better design and search company. I simply think that they lack the focus they had when Eric Schmidt was CEO.

The Motorola deal really seems like it was for patents and there already rumors Google looking to sell of the actual hardware business of Moto. To them the patents are more valuable than the actually products Moto offers and Google really has no need for any of the products

 
Amphipathic:
Something I always wondered about when studying for CFA, in practice do voting rights really affect the value of shares that much? What sort of a discount do they trade at?
The discount is going to tend to have to do with the differences in how investors would run the company and how the people who control it are actually running it- and the perception of how those differences might look going forward.

Frankly I never liked the idea of multiple classes of voting rights giving a small group of people control of the company. The SEC needs to step in and adjust this if more than 50% of a company's voting rights come from shares that own less than 20% of the company.

 
Frankly I never liked the idea of multiple classes of voting rights giving a small group of people control of the company. The SEC needs to step in and adjust this if more than 50% of a company's voting rights come from shares that own less than 20% of the company.

I'm curious as to why you feel that way. I know that if I were the founder of a company I would absolutely attempt to structure it so I kept control. Obviously you can run into problems where the founder doesn't have the operational aspects of a company down and runs it poorly; but isn't that what boards are for? To advise those in control? In the case of Google that's why they were initially forced to hire Eric Schmidt to help with the business side.

 
Addinator37:
Frankly I never liked the idea of multiple classes of voting rights giving a small group of people control of the company. The SEC needs to step in and adjust this if more than 50% of a company's voting rights come from shares that own less than 20% of the company.

I'm curious as to why you feel that way. I know that if I were the founder of a company I would absolutely attempt to structure it so I kept control. Obviously you can run into problems where the founder doesn't have the operational aspects of a company down and runs it poorly; but isn't that what boards are for? To advise those in control? In the case of Google that's why they were initially forced to hire Eric Schmidt to help with the business side.

Oh, of course. But loosening your grip on control is part of the deal when other investors step in.

Yes, it was your company. Then you sold it.

I'm fine with you keeping 45% of the voting rights. That's almost always enough to fend off the Carl Icahns of the world and makes a situation where you are completely forced out of the firm you started practically impossible. But if nearly every other investor thinks you're doing something stupid, they should be able to stop you from doing it. The founders should be allowed to keep a lot of control over the company, but that control should not be absolute.

 

Can someone explain how exactly this increases their control over the company? Doesn't the original ratio of votes (i.e. founders vs. public) still stay the same since they are just issuing non-voting shares to everyone, not taking away any votes?

Does it only matter because of future stock issuances/employee grants?

Not asking this to be sarcastic, just don't understand this part of corp finance.

 

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