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Dollar Shave Club is getting some press today; coincidentally I just used one of their razors for the first time this morning and it was fine, despite having only four blades instead of the now-industry-standard seventeen. So the great razor wars may have been on my mind when I read that Google is splitting its stock to create a new class of non-voting shares. And this story seemed somehow familiar:
(1) Google went public in 2004 with a dual-class share structure that it said would allow it not to be evil, because its visionary founders would not be beholden to the short-term financial pressures of Wall Street;
(2) Facebook is about to go public with a dual-class share structure that it’s pretty frankly saying will allow it to be evil but also oooh connect people etc. etc.,
(3) and it is getting tons of press and has a market cap or pre-market-cap or whatever that’s like half of Google’s despite having like 1/10th of Google’s net income and revenues;
(4) also Facebook is much better at being Facebook than Google+ is at being Facebook;
(5) which makes Google’s relatively elderly late-30s founders Larry Page and Sergey Brin mad;
(6) so they said fuck everything, we’re doing three share classes.
Right? I mean, the announcement says:
[T]here’s no particular urgency to make these changes now — we don’t have an unusually big acquisition planned, in case you were wondering. It’s just that since we know what we want to do, there’s no reason to delay the decision.
And there really is no reason to do it now. The purpose of this is to allow Google to pay out zero-vote shares in the future – to employees and acquisition targets – while preserving Page and Brin’s majority voting control. But by my math, Page and Brin own enough shares that they would still have over 50% of the vote if they paid out $70bn of (pre-split, low-vote) Class A shares in mergers and comp. So many Instagrams! Add in CEO Eric Schmidt’s shares and Google could buy Facebook with Class A shares without insiders losing control. Which suggests that the timing is more about reminding people that Google was tightly founder-controlled before Mark Zuckerberg made it … cool … or … whatever the thing is that he is.
Anyway I have no real problem with them retaining control even by this somewhat goofball mechanism, and they do seem to be somewhat above-board about it. Page and Brin can’t sell down their zero-vote Cs without selling low-vote Bs or converting high-vote As, etc. Still you normally see dual-class structures put in – as they were in Google and Facebook – at or before the IPO, when no one has any responsibilities to public shareholders. It’s kind of weird to create a new class of stock intended to maintain founder control after Google’s been public for eight years. Google’s general counsel David Drummond explains how the board became okay with this, and he starts it with “This is not the usual yada yada … so please read on,” which, again, very Gen-X in a post-Millennial world but okay:
The Class A shares will continue to trade under the “GOOG” ticker symbol, while the Class C shares will trade under a different ticker symbol, so stockholders will be able to trade these shares, just as they can with Class A shares today. Except for voting rights, the Class C shares will have the same rights as the existing Class A and Class B shares. …
Our board of directors carefully considered this proposal to create a new class of stock before reaching a decision. In January 2011, the board established a special committee, comprised of independent, non-management board members to consider a new class of stock, or other alternatives. This committee retained its own financial and legal advisers to assist with its deliberations, and met on numerous occasions over the 15 months that the special committee considered the proposal separately from the board. The committee recommended, and the board unanimously approved, today’s proposal.
Imagine being that special committee. Your constraints are, basically, that you have to do the right thing by the outside shareholders – the dopes who hold the low-vote Class A shares, not Page and Brin and the other insiders who hold the high-vote Class Bs. But, also, Page and Brin can do whatever they want so you’re kind of just there for show. I think there are about three things that you could do:
(1) Nothing! Right? Like there’s concededly no urgency to this, and supposedly your brief is to do the right thing for public shareholders – so why do you have to change the structure to allow Page and Brin to keep control for ever and ever? Presumably because they have very very persuasively argued that that is the only way to avoid Wall-Streety short-termism and maximize long-term value for shareholders and, hey, sure, maybe. But also maybe because they hinted that they could do it without special committee approval so you might as well approve it to get little baubles like requiring any of the founders’ sales of Class C shares to be accompanied by pro rata Class A shares?
(2) This thing, the creepy pseudo-stock-split where every A and B holder gets one share of zero-vote Class C. Pros: on the day following the split, everyone has the same vote as they had on the day before the split, so you haven’t exactly screwed anyone, except for future Class C shareholders (employees and acquired-company shareholders), to whom you have at best limited fiduciary duties. Cons: now everyone has two classes of shares, which is sort of annoying and liquidity-reducing and non-optimal, what with fractional share and round-lot and whatever issues. So every Class A shareholder has been hosed just a tiny little bit. But it’s okay because … that little inconvenience is made up for by the promise that Google will remain in Brin’s and Page’s iron grip for ever and aye and no short-termism and whatever?
(3) The transparent and cynical version is: don’t “split” the Class A shares into As and Cs, don’t create the inconvenience of two widely held publicly traded shares of stock. Let Google continue paying one-vote Class A shares to new hires and new acquisitions. Just change the charter so that, every time they do so, the Class B high-vote shares get proportionally more votes. Or, whatever, just give them 20 votes (up from the current 10) now. It doesn’t matter, they’ll have a majority forever – that’s the point of these changes. And the special committee has decided that ensuring voting control for the founders is good for public shareholders. So why inconvenience those shareholders by making them trade two classes? And if this approach too obviously favors the founders over the interests of public shareholders … why doesn’t option (2)?
Google Founders’ Letter 2012 [EDGAR]
Google Beats on Earnings, Announces New Class of Stock [CNBC]
Google Is Not Doing a 2 For 1 Split [Kid Dynamite]