In anticipation of Google’s stock dropping by 50% on Wednesday (due to its 2 for 1 stock split) it is worthwhile to understand what this means to shareholders.
Stock splits have historically been used to decrease the amount an investor would have to spend in order to buy a “round lot” or 100 shares. This was important when brokerage firms made it more expensive to buy fewer than 100 shares or an odd lot. However, since it essentially costs $8.95 or less from most on-line brokerage firms whether you buy one share at $1,135 or 100 shares at $11.35 the investor doesn’t need a stock split to invest $1,135 in Google and get the same return when the shares increase.
Another reason stock splits have been done is for management to show they believe the company will do well in the future. Overall these don’t change the financials (except EPS will be half of what it was) and in theory the overall value of a company is not affected expect when investors are willing to place a higher valuation metric on future earnings. It makes everyone “feel good”.
English: Left to right, Eric E. Schmidt, Sergey Brin and Larry Page of Google Polski: Od lewej do prawej: Eric E. Schmidt, Sergey Brin i Larry Page z firmy Google (Photo credit: Wikipedia)
This isn’t why Google is splitting its shares
Maybe it’s a good thing that the two people who had the vision and technical expertise will be able to do whatever they want and since they have such huge wealth tied up in the company you would expect that they would run it for the long-term benefit of the other shareholders. However if they don’t execute well they can’t be “forced” to change by everyone else.
Currently everyone except Brin, Page, Eric Schmidt, Google’s ex-CEO and Executive Chairman, and a few other people own Class A shares. Class A shares get one vote for each share. There were 279,883,488 Class A shares outstanding on January 30, 2014. Their trading symbol will be GOOGL after the split.
Class B shares are largely owned by Brin (23.2 million), Page (23.6 million) and Schmidt (4.6 million) and they get 10 votes per share. In total there were 56,167,343 Class B shares outstanding on January 30, 2014.
Class C shares will be given to the Class A and B shareholders but receive no votes on stockholder resolutions. Their trading symbol will be the historical GOOG after the split. These are the shares that the company will probably issue going forward for acquisitions or stock awards.
This means that Brin and Sergey have 468 million votes compared to the 280 million Class A shareholders, essentially complete control of the company as they have just over 55% of the total votes. Maybe the Board could exert enough pressure on either Brin or Sergey to step down if they thought it was being taken in such a wrong direction that it warranted action but otherwise the founders have complete control.
You can just sell your Google stock
One option is to sell your shares if you don’t agree with their decisions. If you don’t think they should be buying robot companies (such as Boston Dynamics) or funding research into using high altitude balloons to connect people in remote areas to the Internet (Project Loon) you can sell your shares and not have to worry about what they are doing. Note that it doesn’t seem that they are spending a lot of money in these areas (at least yet) but it does diffuse their focus on the core business.