Image source: Alphabet.
Thousands of companies have split their shares over the decades, and Alphabet (GOOG +3.44%) (GOOGL +3.71%) is hardly unique in choosing to do a stock split back in 2014. However, the unusual way in which the company then known as Google set up its split made it special, and some will see the first and only stock split in Alphabet's history as a landmark move in corporate governance. With more than two years having passed since the split, investors can now put a value on shareholder influence over major company decisions. Let's look more closely at the Alphabet stock split and what it means for Alphabet and the rest of the stock market going forward.
|
Stock Split Occurred On |
Split Ratio |
|---|---|
|
March 27, 2014 |
2 for 1* |
Data source: Alphabet investor relations. * Issued one new Class C non-voting share for every Class A voting share owned.
How the Alphabet stock split worked
Alphabet set up the stock split in a way that was different from most companies. Typically, companies have only one class of stock, and a split effectively doubles the number of shares that each shareholder owns.
However, at the time, Alphabet wanted to introduce a new class of non-voting shares, and so it structured the stock split to give investors one share of new Class C non-voting stock for every share of Class A voting stock they owned. From an economic perspective, the only difference between the two classes of stock was their relative voting power. Other than that, the two classes were entitled to similar rights on liquidation of the company.
The move concerning Alphabet stock raised concerns among investors about the effect of the split on voting control in comparison to its economic impacts. After a couple years of litigation, Alphabet agreed to compensate Class C non-voting shareholders if the value of the stock differed from the value of Class A voting shares by more than 1%.
How do Class A and Class C shares compare?
During the measuring period set by the settlement, the two classes of stock traded fairly closely. The threshold for compensation was met, but shareholders received only a small amount of compensation. Specifically, Alphabet distributed new Class C shares, with shareholders receiving 2.7455 shares of stock for every 1,000 Class C shares they owned. Since the distribution was so small, most investors received cash based on a value of $556.71 per share, and the amount worked out to about $1.53 per share in cash. Theoretically, that payment was supposed to compensate Class C shareholders for any large disparity between the share prices of the two classes of stock.
However, since the 2015 payment, Alphabet's two classes of shares have seen their values vary widely. Currently, the difference amounts to about $22 per share, or almost 3% of the value of Class C shares. That's actually down from roughly $30 per share in late 2015, but the difference has been as low as $12 to $13 in recent months.
What's a vote worth?
The interesting thing about the disparity between the two share classes is that for all practical purposes, neither set of shareholders has any true control over Alphabet. The Class B shares issued to insiders have 10 times the voting rights of Class A voting shares, and they effectively give Larry Page, Sergey Brin, and Eric Schmidt majority control over the company. As long as they remain in control, even the Class A shareholders, who technically have a vote, won't be able to have any true say in the direction Alphabet goes.
Other companies that have voting and non-voting stock classes have established that a vote has value, even when it's unlikely to make a difference from a policy standpoint. For Viacom (NASDAQ: VIA) (VIAB +0.00%), voting Class A stock fetches about $5 per share more than non-voting Class B stock, working out to more than 10%. That's the case even though Sumner Redstone has effective voting control of the company.
However, not every company sees that large a difference between non-voting and voting shares. News Corp. (NWS +2.13%) (NWSA +1.88%) shares trade with a difference of just $0.33 per share, or around 2%. CBS also features two classes of stock, with less than 2% separating their values.
Despite these other examples, Alphabet brought to the forefront the theoretical and economic value of voting rights. Even when owning a stock provides almost no likelihood of having an impact on decisions, shareholders are often willing to pay up for the theoretical right that having a vote gives them. It will be interesting to see whether that will continue as the length of time since the Alphabet stock split grows.
