What: There's a chance that your shares of Under Armour Inc. (NYSE:UAA) look like they've fallen by half in your portfolio on April 8, 2016. And while it's technically true, that's only half of the story. The reason why Under Armor's stock price has fallen by half today is because the company is effectively doing a stock split, issuing shareholders one share of its new Class C stock to go along with their Class A holdings.
So what: It's a bit complicated, but in short, the company approved the issuance of a new non-voting class of shares on March 16, and is paying a 1-for-1 share dividend today to existing shareholders of record on March 28. According to the March 16 press release:
The Class C stock will be issued through a stock dividend on a one-for-one basis to all existing holders of Under Armour's Class A and Class B common stock, which will have the same effect as a two-for-one stock split.
The shares of Class C stock will be distributed on or about April 7, 2016, to stockholders of record of Class A and Class B stock on March 28, 2016. Application to the New York Stock Exchange has been made to list the new Class C stock under the ticker symbol "UA-C." Shares of Under Armour's Class A stock will continue to trade under the ticker symbol "UA."
In a nutshell, if you owned shares of Under Armour on March 28, they were "Class A" shares, while founder and CEO Kevin Plank holds the "Class B" shares. The "Class C" shares paid to shareholders of record should show up in their brokerage account today.
This move is similar to something that Google (NASDAQ:GOOG) (NASDAQ:GOOGL) did a couple of years ago, designed to keep control of the company firmly with its founders, as stock issued for employee compensation, acquisitions, and other purposes threatened to dilute the combined voting power of key leadership.
The move by Under Armour is absolutely designed to keep Plank firmly in control of the company. As Plank wrote in 2015 in a letter to shareholders, when the company first announced this move:
When Under Armour went public in 2005, we created a dual-class stock structure under which I own Class B shares that have greater voting power. This dual-class structure meant that I would retain control over significant decisions impacting Under Armour's future, allowing our team to focus on driving long-term growth and developing game-changing innovative products, as we continue on our path to become the number one global athletic brand...
...Our current dual-class voting structure is set to end when I own less than 15% of our total Class A and Class B shares outstanding. Dilution from regular employee equity-based compensation and other possible dilution, such as stock-based acquisitions or equity financings, as well as any sales of stock by me, bring us closer to this 15% sunset provision and could ultimately undermine our current governance structure.
After careful consideration by a Special Committee of independent Board members and our Board of Directors, as well as advice from outside legal and financial advisors, the Board has agreed that maintaining our founder-led approach is in the best interests of Under Armour and all of its stockholders.
Now what: In short, your ownership in Under Armour didn't really change today, as this is essentially a 2-for-1 stock split, with the twist that you now own two different classes of shares. It also maintains the status quo, with Plank maintaining essentially complete control over the company.
While it's not totally clear whether this will work out to be in the (very, very) long-term interest of the company, since it creates an entire class of shares that carry no voting power, Plank has proven to be an incredible leader, and since going public, Under Armour has been an absolutely market-crushing investment, in no small part because of Plank's visionary leadership.
Will we look back in 10 or 20 years and be able to say the same thing? I think the odds are in investors' favor in this case, but only time will tell if letting Plank maintain control was the right move for the company and its investors.