Google Inc. (GOOG) (GOOG)â€™s shares fell the most
in almost three months after its latest bid to preserve control
for founders Larry Page and Sergey Brin raised concern among
The stock (GOOG) declined 4.1 percent to $624.60, the biggest
decrease since Jan. 20, weighed down in part by results showing
slower sales growth and a decline in the amount Google charges
for advertising, on a per-click basis. The shares have fallen
3.3 percent this year.
Google unveiled a plan yesterday that lets the company
issue new shares without diluting the foundersâ€™ voting power.
The stock change would create a new class of nonvoting shares
that will be distributed to existing shareholders in what is
effectively a 2-for-1 stock split.
Page and Brin, who made no secret of their intention to
hold sway over the company when it went public in 2004, aim to
keep that control as Google grows larger. The latest move lets
the founders issue stock to compensate workers or make
acquisitions without loosening their grip. For investors, the
result is a lack of input on decision making, said Charles Elson, director of the University of Delawareâ€™s John L. Weinberg
Center for Corporate Governance.
â€œShareholder voting rights are pretty limited in Google,â€
he said. â€œAnd this basically perpetuates that reality.â€
Together with Chairman Eric Schmidt, Googleâ€™s co-founders
have about two-thirds of the companyâ€™s voting power, thanks to a
dual-class stock structure that was created before its initial
public offering eight years ago.
Opposition to Structure
The company already had one class of stock with less voting
power, Class A. The new type, Class C, will have none at all.
Egan-Jones Ratings Co., a shareholder-advisory firm, said
it opposes Googleâ€™s plan. Institutional Shareholder Services
Inc. and Glass Lewis Co., other advisory firms, are reviewing
the proposal and plan to issue reports on it before Googleâ€™s
shareholder meeting, scheduled for June 21.
â€œAs a trusted adviser to institutional investors, we
strongly oppose governance structures, such as currently exists
at Google and as proposed, in which the holders of one class of
common stock have voting rights with fewer votes per share,â€
Egan-Jones said today in a statement.
Itâ€™s hard to tell why the additional step was necessary,
said Tim Ghriskey, a co-founder of the Solaris Group, who helps
oversee about $2 billion in assets, including Google shares.
He would rather see Google pay a cash dividend, Ghriskey
said. Still, if investors arenâ€™t happy, they can always sell
their shares, he said.
â€œWe live with it,â€ Ghriskey said. â€œIt wouldnâ€™t be our
first choice. Our first choice would be split the stock and
donâ€™t create two classes, and start paying a dividend.â€
Google put in the original dual-class structure to insulate
the company from outside pressures while it made potentially
risky investments, such as the video-sharing site YouTube or the
Android mobile operating system, Page and Brin said yesterday in
a statement. The latest change solidifies those protections.
â€œWe recognize that some people, particularly those who
opposed this structure at the start, wonâ€™t support this change –
– and we understand that other companies have been very
successful with more traditional governance models,â€ the
founders said. â€œBut after careful consideration with our board
of directors, we have decided that maintaining this founder-led
approach is in the best interests of Google, our shareholders
and our users.â€
The announcement was made as part of the companyâ€™s first-
quarter earnings report. Profit, excluding certain costs,
climbed to $10.08 a share in the period, the company said on its
website. Analysts had projected (GOOG) $9.64 on average, according to
data compiled by Bloomberg. Excluding revenue passed on to
partner sites, sales rose to $8.14 billion, matching estimates.
That was the slowest increase in net sales in eight
quarters, Colin Gillis, an analyst at BGC Partners LP in New
York, wrote in a research report.
Google gets most of its revenue from Internet-search ads —
the text links that appear in query results. The average cost
per click, a measure of what Google can charge advertisers,
declined 12 percent in the first quarter, an acceleration from 8
percent in the fourth quarter.
Gillis called the decline â€œstartlingâ€ and wrote that it
suggests â€œincremental search volume that is being created is
lower priced inventory.â€
Founders in Control
The desire to hold on to control has always been a driving
force at Google, Gillis said in an interview.
â€œThatâ€™s been Googleâ€™s story,â€ he said.
While the new proposal will be subject to a vote at
Googleâ€™s annual meeting, the fact that Page, Brin and Schmidt
control the majority of voting power makes it likely to succeed.
â€œWe expect it to pass,â€ David Drummond, Googleâ€™s chief legal
officer, said in yesterdayâ€™s statement.
Under the plan, investors will receive one share of the new
stock for each one they hold. So a share valued at $600 when the
split takes effect would become two shares, each valued at $300.
Paul Hodgson, a researcher at GovernanceMetrics
International Inc., a corporate-governance consulting firm in
New York, said the approach isnâ€™t ideal because it puts
unnecessary limits on shareholders.
â€œThat is anti-best practice as far as best governance, but
so was the dual-class structure in the first IPO,â€ Hodgson
said. â€œThere are plenty of companies that have a single class
of shares, one vote per share, and they arenâ€™t paranoid that
shareholders are going to somehow influence the future strategy
of the company.â€
Googleâ€™s founders have lost voting power by selling stock
in recent years, and the new structure would help prevent them
from losing more, said Lise Buyer, principal at Class V Group in
Portola Valley, California.
â€œAs the founders sell a little bit, as they have been
doing every quarter, their voting power relative to the
shareholder base is going down,â€ said Buyer, who helped advise
Google on its IPO.
The stock split wonâ€™t reduce investorsâ€™ power in the
immediate term, since theyâ€™ll still have as many votes as
before, said Clay Moran, an analyst at Benchmark Co. in Delray
Beach, Florida. Still, it adds one more layer of structure.
â€œItâ€™s unnecessarily complex,â€ he said.
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Article source: http://www.businessweek.com/news/2012-04-13/google-stock-plan-irks-governance-watchdogs