Stock split keeps Google's destiny in hands of co-founders

New class of non-voting capital stock leaves co-founders in undisputed control of Google; Brin and Page see the move as way to continue to plan for the long term.

Since Google went public in 2004, co-founders Larry Page and Sergey Brin have been wedded to the idea that management ought to be able to decide what's right for the company without needing to sacrifice future opportunities to satisfy near-term demands from Wall Street.

That philosophy was on display as Google disclosed plans for a 2 for 1 split , which would still preserve their control over the company with the issuance of a new class of non-voting capital stock.

In a note published along with the company's Q2 earnings, Page and Brin returned to that theme, cautioning that were they to lose their voting power, it would undercut their long-term aspirations for Google.

"We have put our hearts into Google and hope to do so for many more years to come," they wrote. "So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world."

Pointing to projects like Chrome and YouTube, which required time and investment to reach fruition, the co-founders said they were able to protect against unnamed "outside pressures," which presumably might have intruded to short-circuit Google's longer-range development planning.

Technology products often require significant investment over many years to fulfill their potential. For example, it took over three years just to ship our first Android handset, and then another three years on top of that before the operating system truly reached critical mass. These kinds of investments are not for the faint-hearted.

Google will issue a new class of stock that won't include voting power. Current Google stockholders will receive one share of new Class C stock for each company share that they already own. But future stock grants to employees will be of the non-voting variety. Ditto for employees of companies that Google might buy in the future. The net effect will be to ensure that Google's existing shareholders -- especially its founders -- retain their current voting power.

Google had 252.7 million shares of Class A stock and 69.5 million shares of Class B stock outstanding as of its March 31, 2011, filing with the Securities and Exchange. Class B shares translate into 10 votes apiece. That's a big benefit for Brin and Page who owned approximately 27 million Class B shares, or about 29 percent of the total voting power at Google, as of the end of March. Another 9 million Class B shares were held by executive chairman Eric Schmidt, who has about 10 percent of the total voting power.
When we went public, we created a dual-class voting structure. Our goal was to maintain the freedom to focus on the long term by ensuring that the management team, in particular Eric, Sergey and I, retained control over Google's destiny...While this decision was controversial at the time, we believe with hindsight it was absolutely the right thing to do. Eight years later, these statements are still remarkably accurate, and everyone involved has realized tremendous benefits as a result. Given Google's success, it's unsurprising that this type of dual-class governance structure is now somewhat standard among newer technology companies.

Will it be enough to entice future investors? Too early to say, but several of the initial reviews pointed out the obvious flaw in the argument. Matthew Ingram described the multiple-voting share structure as "an insult to public investors and the market." Chris Ziegler offered that the "maneuver seeks to grip on Google's destiny by putting shares without any voting power into the public domain."

The stock split announcement was made in conjunction with the company's first-quarter earnings of $2.89 billion, or $8.75 a share, on revenue of $8.14 billion excluding traffic acquisition costs. Including traffic acquisition costs Google revenue for the quarter was $10.65 billion. Non-GAAP earnings came in at $10.08 a share. Wall Street expected Google to report first-quarter earnings of $9.65 a share on revenue of $8.15 billion excluding traffic acquisition costs.

 

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