Quick Thoughts: Google – What’s More Investor Friendly than Growth and Cash Flows?
– Google’s unusual stock split locks in voting control for founders Larry Page and Sergey Brin, and long-time CEO Eric Schmidt.
– The move is largely symbolic, as the trajectory of share issuance means that it would take decades to erode insider ownership to less than 50%.
– Even then, very few companies of Google’s size have ever faced shareholder proxy battles or hostile takeover attempts, likely rendering objections to insider control moot.
– Real investor “friendliness” is strong growth and excellent cash flows. Google management has delivered and is positioned for more.
Never a dull quarter in Internet land. The latest kerfuffle has analysts and investors in a snit over Google’s plan to lock in its current voting structure via an unusual stock split, through which each current shareholder gets one share that votes and one that doesn’t, and after which, all future share grants and acquisitions will made in non-voting stock. Looking at the issue pragmatically, Google founders Larry Page and Sergey Brin, along with former CEO Eric Schmidt, currently control 66% of voting stock. For the insiders to lose majority, the company would have to issue stock equal to 32% of its current capitalization, or more than $60B. Given that the company has rarely included equity in its M&A, and that its employee option and restricted share grants have run just over 1% of outstanding shares per year, any chance to start a proxy battle would be decades away.
While Google’s mechanism for maintaining insider control is unusual, the goal itself is not. 6% of all US companies, representing 8% of market cap, maintain dual class equity structures, with 85% of those featuring at least one class of non-trading stock, typically with enhanced voting rights. These structures are commonplace in media, if not tech, with Comcast and Viacom springing to mind. Note also that shareholder confrontations and hostile acquisitions are rare amongst large companies, even when they are not controlled by insiders. In 2011, there were only 9 US listed companies, of the more than 4,000 tracked by Institutional Shareholder Services (ISS), that saw contested shareholder meetings, down from 14 in 2010 and 25 in 2009. Moreover, the largest hostile acquisition offer EVER was Simon Property Group’s rejected $25B play for General Growth Properties. A hostile play for Google, with its nearly $200B market cap, would seem quite out of reach, even if a suitor could get past the DoJ. So, in a sense, the point is moot.
I tend to be more concerned with insider control when founders are old enough to look for successors. History is rife with the sons of great leaders who own leadership turns out to be not as great. It is also full of internecine battles for control that tear both families and companies apart. Google CEO Larry Page is just 39 and co-founder Sergey Brin is 38. If a fumbled succession plan or family feud is in the future, it is almost certainly FAR in the future.
I think that the false outrage around Google’s fake split is grounded in the bigger issue of investor “friendliness”. Google is secretive. It carries a big cash balance and doesn’t pay a dividend. It spends cash on infrastructure and acquisitions without advance warning or detailed explanation. It provides little investor guidance for future quarters and delivers surprises, mostly to the upside, but occasionally to the down. Against this backdrop, the new equity structure is just another insult. Here too, I think the point is somewhat moot. Google’s competitors – Apple, Amazon, Facebook and others – are just as unfriendly, if not more so. Arguably, the secrecy serves a purpose – intellectual property is at a premium in these innovation fueled, high stakes, litigious days. To me, real investor “friendliness” in TMT is delivering strong growth and excellent cash flow. Against these criteria, Google has been friendly indeed.
Google is now playing for healthy slices in end markets that could be worth trillions of dollars. Despite revenues of nearly $40B, it is growing its top line at a 25% clip in a difficult global economy. It is the obvious leader in on-line advertising with the most sophisticated and far reaching distributed data processing infrastructure on the planet. It controls Android, the largest portable device platform, which gives it a first crack at providing services for and delivering ads to a huge and rapidly growing audience. The hubbub around share classes is just noise.
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