Cash Protection and Control by Google

Thursday, April 12th 2012. | Internet News

GOOGLE_NS_20120412183611Google Inc. unveiled a 2-for-1 stock split designed to assuage investors while also allowing its founders to maintain their control over the company.

The Internet giant said Thursday it would create a third class of stock, nonvoting shares that would be separately listed on the Nasdaq Stock Market. Current investors would receive one share of the nonvoting stock for each share they now hold.

The move, announced as Google posted a 61% jump in first-quarter profit, will effectively double the number of outstanding shares while halving the price. That could drive more trading of the stock by making the price more attractive, said Mark Borges, a principal at Compensia Inc., a compensation consulting boutique.

The stock closed Thursday ahead of the announcement at $651.01, up 2.4% on the day and about 38% in the past five years.

Google’s stock split will also allow the company to hold on to its cash pile of $49 billion, as of the end of March, rather than follow Apple Inc.’s AAPL -0.55% playbook by giving a cash dividend to shareholders. Apple has around $100 billion in cash.

And because the new class of stock includes no voting rights, it means that co-founders Larry Page and Sergey Brin will keep their voting power.

As of April 2011, Mr. Page, who is currently Google’s chief executive, Mr. Brin and Executive Chairman Eric Schmidt collectively controlled nearly 70% of the voting power, thanks to their ownership of Class B shares that have 10 times the voting rights of Class A shares that most shareholders own.
[GOOGLE] Associated Press

“We have protected Google from outside pressures and the temptation to sacrifice future opportunities to meet short-term demands,” Mr. Page wrote in a letter to shareholders, explaining the stock-split proposal.

He said that routine, stock-based compensation given to employees as well as stock-based acquisitions “will likely undermine” Google’s current ownership system. “So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world,” the letter said. He noted there was no particular urgency for the move and “we don’t have an unusually big acquisition planned, in case you were wondering.”

The decision comes as the company prepares to close its acquisition of Motorola Mobility Holdings Inc., MMI 0.00% which had 20,500 employees as of Dec. 31.

Mr. Page acknowledged that some investors—particularly those who have opposed its dual-class voting structure—won’t support the change. But he said Google’s board, which spent more than a year considering the move, decided the structure is in the best interest of the company and shareholders.

Google said the proposal will need shareholder approval at the company’s annual meeting in June, but this is a formality given the founders’ control.

Ryan Jacob, manager of the Jacob Internet Fund, which held $1.7 million worth of Google stock at the end of February, said that “you never like to have less rights than you had previously.”

But he said that when Google made its initial public offering in 2004, the founders made it clear they would maintain control. As long as Google continues to perform well, Thursday’s move is acceptable, he said.

Sameet Sinha, an analyst at B. Riley & Co., said the nonvoting feature of the stock split “will be tough to swallow” for some investors, while Mark Mahaney of Citigroup Inc. said it was “not that material” and that “stock splits don’t mean that much.”

The stock-split move came as Google, an online-advertising powerhouse, reported first-quarter profit rose 61% as Google controlled costs. Revenue gained 24%, meaning the company’s growth is slower compared with much of 2011.

Google continued to pull back on hiring, adding about 600 since the end of December, down from hiring 1,100 and 2,500 people in the prior two quarters. Its total work force stood at 33,077 at the end of March.

For the second straight quarter, analysts voiced some concerns about one aspect of Google’s business: the sale of ads on mobile devices.

As more people access the Web through their mobile devices, the fear is that could hurt companies like Google because mobile ads cost less than ads viewed on desktop computers.

On Thursday Google said the average amount paid by advertisers every time someone clicked on their ad fell by 12% compared with the first quarter of last year. That’s worse than the 8% drop Google reported in its fourth-quarter results.

But the company overcame the drop by selling more ads. The growth of paid clicks—a measure of how frequently consumers click on its ads— continued to accelerate, rising by 39% in the first quarter compared with a year earlier.

Overall, Google posted a quarterly profit of $2.89 billion, or $8.75 a share, up from $1.8 billion, or $5.51 a share, a year earlier. Revenue rose to $8.14 billion from $6.54 billion.

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