Google Inc. announced a new class of shares (Class C) that will be issued to existing shareholders at no extra cost. However, the catch here is that there will be no voting rights attached to the shares, thus enabling founders Larry Page and Sergey Brin as well as Executive Chairman Eric Schmidt to retain the majority voting power.
The value of each share will be split in two on the date this goes into effect (expected June), with half the value allotted to the existing share and the other half to the Class C share. Therefore, the value of each Google share would be halved.
Reason for the Deal
The main reason for creating the new class of shares is to prevent the dilution of the majority voting power, while at the same time halving the value of existing shares. This would enable Page, Brin and Schmidt to take difficult decisions that may not generate immediate profits.
Google has been taking a number of steps to expand and grow the company (the development of Android, for instance). Google’s expansion into mobile was essential, but comes with certain problems of its own. Investors with a short-term outlook may not be appreciative of this approach and may get in the way of Google’s long-term growth, so say the majority shareholders.
What This Means for Investors
This is obviously good news for small investors, since they can now invest in Google shares, as the value per share will be halved. For the existing shareholders, it is like getting dividend in the form of stocks instead of cash.
Investors who are there for the long haul may not suffer, given Google’s history of growth and innovation. Short-term investors would, however, do best to avoid the shares (evident from the selling activity following the announcement).
Of course, there is always the risk of decisions going wrong and Google wilting against the competition somewhere down the line (however unbelievable that may sound right now).
This could be the new way of doing things in the evolving tech sector. Mark Zuckerberg of Facebook has structured its maiden IPO to maintain tight control over it. Zynga (ZNGA - Snapshot Report), the popular gaming company, follows the same path. It is true that Google has been around a while longer, but the company remains at the forefront of technological change.
Google shares currently have a Zacks Rank of #2, implying a Hold rating over the next 1-3 months. Our long-term rating remains Neutral.