U.S. stocks rose to a new record high on Wednesday, as the benchmark S&P 500 notched up an 0.3% gain. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) rose 0.2%, to within four points of its Dec. 31 all-time high. Meanwhile, Google (NASDAQ:GOOG) is about to introduce a new share class in a slightly convoluted operation that will see existing shareholders receive a 1-for-1 distribution of Class C stock. Here is your eight-question FAQ to understand the transaction and its impact on shareholders.
Up until now, Google has had two classes of shares: Class A (listed on the Nasdaq under the ticker GOOG) and Class B (founders' shares that are not publicly traded). On Wednesday, the company distributed a stock dividend of one Class C share for each share of existing Class A/Class B stock. Class C shares will be publicly traded and will begin to trade on Thursday.
What happens to the tickers?
Class C shares will inherit the ticker GOOG; meanwhile, Class A shares will trade under a new ticker, GOOGL.
What will happen to Google's share price?
The new Class C shares are expected to begin trading on Thursday. With twice the number of shares, investors can expect that, once the Class C shares begin to trade, both the Class A and Class C shares will trade at approximately half of Wednesday's closing price for the Class A shares, or $565.55. (In fact, trading on a when-issued basis, the new Class C shares closed at $567, and the new Class A shares closed at $568.07.)
What if the two shares trade at different prices?
The shares may not trade at exactly the same price -- there was a persistent difference in price between the two classes of Chipotle shares, for example. As a result of a shareholder lawsuit, Google has agreed to compensate shareholders if, after a year, the average price of the C shares differs from that of the A shares by more than 1%. (You can find the structure of the compensation agreement here.)
How are the Class C shares different?
Per Google's registration document for the Class C shares [my emphasis]: "Except as expressly provided in our certificate of incorporation, shares of Class C Capital Stock have the same rights and privileges and rank equally, share ratably, and are identical in all respects to the shares of Class A Common Stock and Class B Common Stock as to all matters."
It sounds like there's a catch in that statement. What does the certificate of incorporation say?
OK, yes, there is a catch: Class C shares have no voting rights. For reference, Class A stock has one vote per share and Class B stock, which is mostly owned by co-founders Larry Page and Sergey Brin, has 10 votes per share, giving Page and Brin majority voting control.
If Page and Brin already have majority voting control, why the need for the new shares?
The new shares don't dilute shareholders' existing voting rights; however, Google has in the C shares a new "currency" with which it can raise new capital without giving up any voting rights. Page and Brin may have been concerned that future stock issuance, had it been denominated in Class A shares, would eventually strip them of their voting control of the company.
What does this mean for long-term shareholders?
Not terribly much. Larry and Sergey are just solidifying their grip on the company they founded. As they wrote in their IPO Founders' letter:
Google has prospered as a private company. We believe a dual class voting structure will enable Google, as a public company, to retain many of the positive aspects of being private. We understand some investors do not favor dual class structures. Some may believe that our dual class structure will give us the ability to take actions that benefit us, but not Google's shareholders as a whole. We have considered this point of view carefully, and we and the board have not made our decision lightly. ... As an investor, you are placing a potentially risky long term bet on the team, especially Sergey and me.
If you trusted their stewardship of the company thus far, you can probably continue to make that leap of faith; after all, the original long-term bet of buying shares in the IPO has paid off handsomely. At this stage of Google's development, that trust is supported by more than faith alone.