Google’s Founders Float New Stock Structure Plan To Split Stock While Retaining Control

While Google‘s (NASDAQ:GOOG) Q1 2012 earnings were mostly a happy affair with strong revenue and profit growth, the main highlight of the earnings announcement was the new proposed stock structure, through which the founders aim to increase and maintain their control over the company. ^[1]

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Google already has a dual class structure, which has enabled its founders to maintain a majority control of the voting rights for the company. While that enables it to prevent outside parties from taking over or interfering in its management decisions, it doesn’t stop dilution in their voting power due to stock based compensation for employees or stock based acquisitions.

Google’s management has proposed creating a new class of non-voting shares – Class C – which will be given to each current class A and class B stock holder by way of a stock dividend. This move will essentially split the stock, creating twice the number of shares as there currently are now, with every stockholder maintaining the same voting interest as they do currently.

However, the new non-voting class C shares will trade separately, and will be used by Google primarily for its stock based compensation and acquisition needs while preventing any erosion in the voting rights of the founders. They have also added in a few checks and balances, to make sure that if the founders sell their class C shares according to a stock sale plan started in 2009 as they will also have to sell their class B super-voting shares to maintain the same link between their voting and economic interests in the company, with a few riders.

When Google went public, it faced a lot of criticism over its proposed dual class voting structure, which concentrated all of the decision making power in the hands of the founders. However, it also allowed them to focus on the long term and make ambitious bets like Android, Chrome and YouTube, instead of playing to the gallery and maximizing short term profits at the expense of long term growth. Seeing Google’s success, such dual class voting structures are a norm in the tech industry now, with many others like Zynga and Facebook using it.

While this new structure may be another step back in terms of corporate governance standards and lead to fewer rights for minority shareholders, it will definitely give Google the freedom to pursue the long term strategy its founders decide is best for the company.

Whether or not this is a good move for Google’s shareholders will depend on how successful the long-term bets of its founders are, and how much they pay off in the coming years.

The proposal will be up for a shareholder vote on June 21. Given that the founding team has majority control of the voting power, it’ll obvioulsy pass. We will incorporate the change in our model following the vote.

We currently have a $670 Trefis price estimate for Google. Google derives most of its value from advertising, a space where it competes primarily with Microsoft, Yahoo and Facebook.

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1. 2012 Founders’ Letter, Google IR [↩]