Google Splits, Microsoft Goes Free

U.S. stocks closed at another record high yesterday, and they're little changed this morning, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.05% and 0.10%, respectively as of 10:25 a.m. EDT. In today's headlines, Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) new share class begins trading this morning; meanwhile, Microsoft's (NASDAQ: MSFT  ) stock is higher than it has been at any time since April 2000 -- near the peak of the technology bubble (the Nasdaq Composite index hit an all-time high on March 10, 2000).

If you're concerned that the price of Google's shares has halved overnight, don't be. With the start of trading of its new Class C shares today (the ticker is "GOOG," inherited from the Class A shares, which now trade under "GOOGL"), Google has engineered what is effectively a two-for-one stock split. The new shares were distributed as a stock dividend to owners of the existing A (publicly traded) and B (nonpublicly traded) shares on a one-for-one basis. However, the new C shares are different from the first two classes in terms of their voting rights: C shares don't have any! (A shares have one vote per share, B shares -- owned by company insiders -- have 10 votes.)

The operation creates a new "currency" that will not undermine the majority voting control of Google founders Larry Page and Sergey Brin if the company decides to issue new shares. Going strictly by the textbook, such an operation undermines ordinary shareholders' rights and is, therefore, poor governance; whether you believe that is true in this case depends on how you rate Page and Brin's stewardship to date. Personally, I don't think investors need be concerned (full disclosure: I'm not a Google shareholder). If you want to know more about this somewhat convoluted share split, you can consult my FAQ.

And speaking of governance ... outside shareholders can be helpful in pushing a company out of a rut. Since former Microsoft CEO Steve Ballmer announced that he would retire last August, the company's stock has rallied nearly 30% to a 14-year high. While activist investor ValueAct Capital was not directly responsible for Ballmer's departure, it was clearly instrumental in igniting a new sense of urgency at Microsoft's board.

So far, I've been very impressed by Ballmer's replacement, Satya Nadella, who seems willing to steer his own path for the company (while being diplomatic enough to pay homage to Ballmer's leadership). Yesterday, Microsoft said it would make its Windows operating system free for smartphones and small tablets. While this is unlikely to alter the balance of power in the smartphone business -- Microsoft is an also-ran behind Apple and Google/Samsung -- it does suggest that Microsoft is letting go of its paranoia about protecting the Windows franchise. It was that very mindset that enabled Google to come from nowhere and grab the lead position in the smartphone OS market with Android in the first place.

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