In many ways the recent Stock Split of Google (GOOG, GOOGL) has been often misinterpreted by media and investors. This move to strengthen the hold of founders larry Page and Sergey Brin on the Internet Giant has been criticised by media stating it is not in the interests of the shareholders. However, those investors who feel a little hard done with this move, need to remember that investing in Google, is synonymous with investing in the vision and strategies of its founders. So, even if that means sacrificing a little in the short run to make sure the founders have their way in the affairs of the company without any hindrance, it is pretty much worth it.
What The Stock Split Actually Means?
According to the Split, Google will create a new class of non-voting capital stock, which will be listed on NASDAQ. These shares will be distributed to all stockholders in the form of a stock dividend. So, if you have one stock of Google, you will get an additional stock, without voting rights.
Google has been enjoying dual class shareholding architecture. The founders own Class B shares, which have 10 times the voting power of class A stock, which is normally traded on the public markets .However, from now on, apart from the normally traded shares, that trade under the GOOGL ticker, the new non-voting Class C stock will trade under the GOOG ticker.
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- GOOG 15-Year Financial Data
- The intrinsic value of GOOG
- Peter Lynch Chart of GOOG
Why This Move Was Necessary
The stock split will, in effect have no impact on the power structure at Google, and will merely serve to cement the voting power of its founders.
This move was necessitated by the fact that the company has in the past participated in a lot of stock based acquisitions. It hasn’t helped either that the company has been giving a lot of stock-based compensations to employees. All this has diluted the voting authority of its founders to a point, where if they did not take this step of issuing stocks with non-voting rights; it would risk the leadership losing their say in the company.
After the IPO, Larry page, Sergey Brin, and Eric Schmidt will together control 37.6% of the voting power of Google, and the executive management team and directors as a group will control 61.4% of the voting power. New investors will fully share in Google's long-term economic future, but will have not have the ability to control strategic decisions through their voting rights.
Finally, there is a lot of investor curiosity over why both the GOOG and GOOGL stock were up 4% and 3% respectively after the stock split. A simple way of explaining this would be that prior to the stock split, the google stock was priced at $1125 which was very expensive and kept away a lot of retail investors who could not afford the stock. Post the split, the stock is more affordable and the volume of trading of both the google stocks has soared to 500,000. With increased volume of trading, price and volatility of the stock has also increased. So, this increase is really not an indication of investor sentiment on the stock split. However, just to re-iterate, though this Stock-split might seem to be a malicious move by the founders to deprive its shareholders of voting rights and gaining control over the company, in reality however, it is a very logical decision and a very innovative one at that!