Google Inc.
(
GOOG
) 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 Mechanics
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).
Conclusion
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
), 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.
GOOGLE INC-CL A (
GOOG
): Free Stock Analysis Report
ZYNGA INC (
ZNGA
): Free Stock Analysis Report
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