Yesterday, in the second paragraph of the press release announcing its Q1 2012 earnings, Google said its board had unanimously approved “a stock dividend proposal.”
But as the company explained in a letter from its founders, it’s not a dividend. It’s “effectively a stock split.”
Well, actually, it’s not really a stock split either.
It’s a new kind of stock, and current investors will get one share of this new kind of stock for every share of existing Google stock they own.
So what the heck is Google doing? And why?
Here’s what you need to know.
Q: I own Google stock. What do I get?
A: On the date that the deal goes through — it has to be approved by shareholders — you will get two shares of Google stock for every one share you own today, and the price of each share will be half the price of the current shares. It’s like a 2 for 1 stock split.
So for instance, if you have 1,000 shares at $600 on the day the deal happens, you’ll suddenly have 2,000 shares at $300. The total value will be the same. That’s what happens in a 2:1 stock split, normally.
Except: unlike a normal stock split, half of the shares will be a new class of shares called Class C. They won’t carry any voting rights.
Q. Why’d they call this a dividend then? Dividends are cash, right?
A. Because it’s paid like a dividend — on a certain date, owners of Google stock get something new. In this case, a new type of Google stock.
It was kind of misleading, though, especially given the noise from some investors before the earnings call that they wanted to see a dividend.
Q: So will the class C shares trade separately than the current shares?
A: Yes. They’ll be a different kind of Google stock with a different ticker symbol.
Q. Who else does this?
This is pretty rare for tech stocks, but is more common in other types of companies — like media companies.
One example is Comcast, which has two classes of stock. Comcast Class A common stock trades under the symbol CMCSA and has voting rights of 0.1373 votes per share.
Comcast Class A Special stock trades under the symbol CMCSK and has no voting rights.
CMSCK trades at a slight discount because it doesn’t have these voting rights.
Q. Hang on a second. So will Google Class C shares trade at a discount?
A. Investors expect so, yes.
Q. So that means that the value of my shares post split will probably be LESS than the value pre-split.
A. Maybe. Although the Class A shares might rise a little bit to make up the difference.
After that, the two prices will probably move more or less in lockstep, but with day to day variations.
Investors don’t seem to like the deal very much — the stock is down 4% today, which is slightly more than the overall market. But that could also be a reaction to other items on the earnings call, like a decline in cost-per-click.
Q. I’m a Google employee. How does this affect me?
As is usual in a split, you’ll get twice as many stock options, with a strike price of half what your original strike price was.
For instance, if you had 1,000 Google options at a strike price of $500, you’ll have 2,000 options at a strike price of $250. But half of your new options will be Class C shares.
Equity grants are a little more complicated. But the thing to note is that after 2012, most employees will get their equity grants in Class C non-voting shares.
Google has a memo with all the details and charts that lay it out. You’ve probably already seen it if you work there, but Google filed it with the SEC for everybody else to see.
Q: THE BIG QUESTION: Why is Google doing this?
A. In the simplest possible terms, the three people who basically run Google — cofounder and CEO Larry Page, cofounder Sergey Brin, and chairman and former CEO Eric Schmidt — want to make sure they have control of the company for a long time.
They want to try and avoid what’s happening with Yahoo now, where an activist shareholder gets upset and tries to install its own board members and influence strategy.
Q. But don’t they already have control?
A. Yes. They and a few other insiders own a THIRD class of stock, Class B. It has 10 votes for every 1 vote of Class A Stock. It does not trade on the public market.
With this and their regular stock holdings, they already have 66% voting rights.
Q: So why’d they need this?
A. Because over time, as Google distributes more stock to employees, and uses it in acquisitions, there was a possibility that the total number of Class A shares would eventually outweigh the founders’ voting shares.
Especially if the founders wanted to sell their shares.
Q. So wait — can’t Eric and Larry and Sergey just sell all their Class C shares and cash out without losing any votes?
A. Not exactly. There’s a “stapling provision” that says for every Class C share they sell, they have to either sell a Class B (super 10-vote) share, or convert a Class B into a Class A (1-vote) share.
That’s the case until their ownership falls below a certain threshold. The details will be coming in a future proxy statement.
Basically, this means that the founders’ control will stay aligned with their economic stake in the company.
Q. But why did Google do this now?
A: That’s not clear. Larry Page says the company has no big acquisitions happening in the near future, and Google has more than $50 billion in cash to fund them anyway.
But Google does big acquisitions pretty regularly — Motorola for $12.5 billion last year (still pending), DoubleClick for $3.1 billion in 2007 — and does smaller ones at a pace of 30 or more per year.
Or maybe this is inspired a little bit by current events, like Yahoo’s proxy fight with Dan Loeb, or the way Facebook founder Mark Zuckerberg will retain voting control after that company’s IPO.
Q. So basically, investors have to have a lot of trust in the three guys running the company.
A. Yes. It’s always been that way, though.
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