Google's Stock Split: Good For Shareholders? (Update 1)
Google announced that it would be creating a new class of stock, effectively issuing a stock split that is "designed to preserve the corporate structure that has allowed Google to remain focused on the long term."
On the conference call, CEO and co-founder Larry Page said that many investors have asked for a stock split, and this effectively grants it to them. This, however, isn't the traditional stock split, in that Google is creating a third class of stock that will have no voting power. Google already has class A and B shares.
|CEO Larry Page|
It allows Page, co-founder Sergey Brin, and Chairman Eric Schmidt to maintain the majority of voting power in the company, something the Internet giant noted in the founders' letter. "The main effect of this structure is likely to leave our team, especially Sergey and me, with increasingly significant control over the company's decisions and fate, as Google shares change hands...," the letter said.
There is, however, a "stapling" requirement. This means that, above set thresholds, if the founders and Schmidt's economic interest in Google declines, their votes will as well.
Not everyone, though, has been won over over by Google's move. Citigroup analyst Mark Mahaney, for example, even called the split "odd" in a research note. Nonetheless, Page and Brin note the "structure will also make it easier for our management team to follow the long term, innovative approach emphasized earlier..." In other words, the co-founders and Schmidt are committed to Google in the long run, and they want Google to be focused on the long term, not the short-term demands of Wall Street.
Google has created vast wealth since going public in 2004, and the company noted that focusing on the long-term is important maintain this momentum. Over the past five years, shares of Google have gained 38%, outperforming the 26.2% return in the Nasdaq, and the -3.89% return in the S&P 500.
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Google, for its part, is focusing its resources on fewer, more select, initiatives. The new class structure will allow the company to continue making these types of bets to focus on growth.
During the earnings conference call, Page cited Android as an example of one of the key initiatives Google has undertaken. The project has been around for six years, but the public has only seen it for three years. "We have a limited number of things we can do. We are limiting our speculative bets and focusing on the business," Page said.
Google is increasingly focusing on mobile search and advertising, something it believes will be a huge revenue driver for the company. Deutsche Bank analyst Lloyd Walmsley believes there is "meaningful upside potential" in the shares, thanks in part to improving mobile cost-per-clicks (CPCs) during the holiday season, and continuing market share gains in mobile, as well as display. Walmsley rates Google shares "buy" and raised his price target from $649 to $680.
Mobile advertising is one of the reasons why CPCs fell approximately 12% year-over-year during the first quarter and 6% from the fourth quarter of 2011.
Initiatives such as mobile, YouTube, social media, and even Project Glass are important steps that Google needs to take to continue driving revenue higher. This stock split is designed to support these efforts.
Now it's up to Page and the rest his team to prove they are worthwhile.
Interested in more on Google? See TheStreet Ratings' report card for this stock.
--Written by Chris Ciaccia in New York
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