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Google Inc.'s (GOOG) carefully structured stock split keeps insider control of the company at the same level but dilutes other shareholders' influence and raises the prospect of current owners having lifelong control of the company, experts said Friday.
Thursday, the Mountain View, Calif., company said it would create a new class of stock, which would be listed on the Nasdaq Stock Market and be distributed to shareholders via a tax-free dividend. Each holder will get a new Class C share for each Class A and Class B share, producing an effective two-for-one split.
The twist is that the new shares will be a nonvoting class of stock. The distribution preserves the level of control for Chief Executive Larry Page, co-founder Sergey Brin and Executive Chairman Eric Schmidt, who collectively hold about 66% of the company's voting power.
As a result of the split, shareholders will have twice as many shares but no additional influence, an issue that can intensify as more Class C shares get added over time, said MKM Partners event-driven strategist Keith Moore.
"Shareholders are generally aggravated their voting power will be diluted," he said.
Google's Class A shares closed down 4.1% at $624.60 Friday.
"From a shareholder perspective, this should be very troubling," said Charles M. Elson, head of the Weinberg Center for Corporate Governance at University of Delaware's business school. If something is going wrong at the company, he said, shareholders have very little they can do to influence the company's direction.
"That lack of accountability ultimately leads to poor management decision-making," Elson said.
The structure will make it harder for shareholders to challenge Page, Brin and Schmidt, as activists have done at other tech companies. For example, the founders of Yahoo Inc. (YHOO) and Research In Motion Ltd. (RIMM, RIM.T) recently diminished their respective roles in part because of shareholder complaints.
Barry Genkin, a partner at law firm Blank Rome LLP in Philadelphia with expertise in corporate governance, said if Class C shareholders are dissatisfied, their chief recourse simply is to "vote with their feet and that's to sell the stock."
Google's Page said on the company's conference call Thursday "investors and others have always taken a big bet" on himself and Brin. "That bet will likely last longer as a result of these changes."
Page and Brin also said in a letter they "decided that maintaining this founder-led approach is in the best interests of Google." A Google representative reiterated the founders' comments in an email Friday.
The split will provide the company more flexibility in rewarding employees and in making acquisitions, the founders said, though Google was quick to tamp down speculation a big deal was in the offing.
Evercore Partners analyst Ken Sena said in terms of voting interest and economics, the split wouldn't have much of an impact initially. But he noted the new structure raised the prospect of giving Page, Brin and Schmidt lifetime control over Google.
Under the pre-split structure, a point may have arrived in a 10-year time span in which the owners' voting power fell below 50%, he said, just through acquisitions and stock-option issuance to employees.
"Now you have a currency that could be used instead where there's no voting dilution of the three," Sena said.
Google's Class C shares likely will trade at a discount to the Class A shares currently on the market, although the difference is expected to be minimal. "The plan should not change a holder's fundamental evaluation of the merits of holding [Google] shares," MKM's Moore said.
The price of the Class A shares is expected to be cut in half after the split.
Other companies have dual-class stock structures. News Corp. (NWS, NWSA, NWS.AU), which owns Dow Jones & Co., publisher of this newswire, and The Wall Street Journal, has Class A shares with limited voting rights as well as more powerful Class B shares. As of Friday's close, the more narrowly held Class B shares were priced 1.9% higher.
Investor wariness about the new stock structure contributed to the decline Friday in Google's share price. In addition, investors were re-evaluating the quality of Google's first-quarter earnings increase, which was helped by a lower tax rate and slower hiring.
Sameet Sinha, analyst at B. Riley & Co., said the shares' move lower came as Wall Street analysts were largely raising price targets and estimates based on Google's improving fundamentals.
"The nonfundamental issue is the stock split, and that's what investors are working through," he said, adding some are finding the new structure is "probably not that good a thing."
-By Joan E. Solsman, Dow Jones Newswires; 212-416-2291; firstname.lastname@example.org