With Alphabet Inc (Google) stock (NASDAQ: GOOG) trading over $1400 per share, many investors have been asking if Google stock will split. The short answer is no. Google stock is unlikely to split because investors are now used to stocks having high share prices and there is not a reason for it to split. Amazon stock split very early but hasn’t since then.
A stock split is a common phenomenon in the stock market, whereby public companies split existing shares into multiple shares, all in the effort of boosting liquidity. While a split always increases the number of shares in distribution, the total value often remains the same. Google has gone down the same route, carrying out a stock split that set new precedence while according to insiders and management full control.
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Google Stock Split Approval
While Google did first announce a move to carry out a stock split in 2012, it did not materialize immediately. Shareholders rejected the push on concerns that the split’s unique structure would benefit insiders and not them.
A bone of contention cycled around how the tech giant intended to create multiple classes of shares. Instead of doubling the shares as is the case with a normal stock split, the tech giant opted to create a brand new class of share. The new shares, Class C, were to be distributed for each share of Class A that a shareholder-owned. Insiders owning Class B were also entitled to Class C shares.
The stand-off emanated from the fact that Class C shares did not entitle holders to voting rights. With these structure insiders owning the Class C shares could sell their holdings and still not dilute their holdings in terms of voting rights, by virtue of owning Class A. Normal shareholders, on the other hand, owned shares that did not entitle them to participate in any decision making in the company.
Pension funds and institutional investors went to court, arguing that the stock split structure favored insiders and not public shareholders. After months of litigation, an agreement was reached between the company and shareholders, resulting in the split in 2013.
Compensation For Disparity
The settlement provided owners of Class C shares with compensation whenever the shares traded at a discount of more than 1% from Class A shares within the first year of trading. During the first year after the split, Class C shares traded with an average discount of between 1% and 2%. Class C shareholders ended up getting small payments as compensation for the disparity arising from the split.
In recent years the disparity has been far much greater at times, amounting more than $30 a share or more than 5%. Amidst bigger than expected disparity, there has also been a time when the disparity has narrowed to between 1% and 2%.
While Google’s Class A shares do come with voting rights at times, they are meaningless given that each share wields an extra ten vote. Class B Shares account for the biggest share when it comes to voting rights, which sees the holders control the decision-making process within the company. Conversely, Class B shareholders, often referred to as insiders will continue to maintain control over Google’s affairs as long as the insiders don’t sell them.
While Google set precedence on stock split should go through, its unique model has become the new norm in the market. Facebook has already hinted at the possibility of turning to this kind of stock ownership structure should it ever decide to carry out a stock split. Some companies have opted for multiple classes of shares, all in the effort of ensuring management maintains the right to control.
Multiple classes of shares work best in companies with a proven track record of growth. In this case, management would be justified to opt for such structures all in the effort of retaining control that ensures they can do whatever they see fit, as long as it can accelerate underlying growth.
Alphabet is a perfect example of a company with multiple classes of shares that has grown to become a juggernaut within the tech space.