Google’s “stock dividend”…

Back on April 12, Google announced they were creating a new class of non-voting stock which will be issued as a stock dividend to current shareholders.  It’s sort of like a stock split in that regards.

The catch again is that they are class C non voting shares.  Which means that co-founders Larry Page and Sergey Brin will continue to hold majority control over the company in what they call, a “founders-led approach”.

There is nothing inherently illegal about this since there is something called the controlled company exemption to corporate governance rules for publicly listed firms.  Back when the NYSE was trying to get the family controlled Ford Motor Company to be listed on their exchange, this exemption was created so that the controlling interests would not see any sort of dilution in their stakes in the company which could make them lose control/influence to outside lobbyists or acquirers.  However, these had some safeguards built in to them requiring the majority of INDEPENDENT shareholders (which means excluding management and directors) to approve the issuing of these non voting shares.

Google’s proposal violates this basic tenant because it did not even propose this to current independent common shareholders for voting.  The insult to injury is that new Google employees will also be issued these non voting shares, meaning they have no voting power in the company.  Now I’m not naive enough to know that the vast majority of voting power is held by insiders, fund managers, and institutional investors.  I also understand this proposal will not dilute current shareholders voting power either because they’ll receive one non voting share for each share of common stock they currently own.

From a corporate governance point of view though, it does raise the issue of accountability by management (where bad decisions on their part could lead to the destruction of shareholder value).  The vast majority of Google’s revenue and profits are from pay per click advertisement via search.  Where is the rest of revenue generating innovation?  Android isn’t monetized at all.  Google runs a bunch of “free” services like e-mail, photo and video sharing, a blogging platform (what I’m using here quite ironically), and now, a social networking platform.  The purpose of all that is to feed their main revenue driver.  Mind you that some these were acquired and not developed in house by Google.   I’ve written in the past about the lack of integration with many of these products.  Yet, they can come out with some nifty April Fools day stuff.  As a matter of fact, Google has a nice graveyard of initiatives which did not pan out.  The following image courtesy of wordstream.com makes it easier to see…

XEROX had a research and development lab known as PARC which actually came up with a number of innovations and inventions which were critical to the desktop and mobile computing world which we see today.  The problem is there was little accountability when it came to all of that funding, and how all of these projects could be monetized and yield a return on that funding.  Apple had that exact same problem with their Advanced Technology Group (ATG) which was led by former PARC scientist, Dr. Larry Tesler.  ATG worked on all sorts of fun and innovative projects but very little ended up making it into shipping product because no business case could be made.  In the meantime, the company as a whole was floundering and falling behind in terms of shipping a modern operating system which could keep up with the ever increasing demands posed by being connected to the Internet.  Similar to PARC, little actual monetization occurred with many internal projects.  The problem at both companies were similar; lack of strong leadership, a false sense of security brought on up overconfidence and arrogance, and the lack of accountability for throwing money down into what seemed like a bottomless pit.  Shareholders of course have power in such circumstances by being able to exert their voting power but with this sort of non voting class of shares where the founders (who are also making key decisions) have a controlling interest, there is little that one can do until it is too late.  One of the first things Jobs did when he re-asserted control of Apple was to dismantle ATG (as opposed to having shareholders crawl up his ass to get the bleeding to stop).

As it stands, the primary reason which I’ve noted before as to why I divested myself of all my GOOG shares was because of the Motorola Mobility acquisition.  There’s a lot of baggage (sizable workforce which increases Google headcount and expenses, legacy hardware, manufacturing facilities) and lack of synergy in terms of corporate culture.  If part of the reason was to acquire MMI’s patent portfolio, then the acquisition would also be an expensive one since much of that portfolio is FRAND encumbered.  And if Google does decide to get into the hardware business (manufacturing Android mobile handsets and tablets), then it will be in direct competition with their other Android partners (the type of move that didn’t work out well for Microsoft when they came out with the Zune and alienated their PlaysForSure partners).    Furthermore, Google does not get customer support which comes with the territory when you get into the business of selling an actual branded hardware product.  Customer support does not come cheap unless outsourced (something which Apple does not do with their AppleCare call centers).

The bottomline is that this $12 billion acquisition is going to have to show some returns.  I personally just don’t see it.  So who takes the hit if over time, this ends up turning into a huge write off?  The shareholder who isn’t an insider, that’s who.  Which is why I got out when it was last near its high.  And now this idea of throwing investors a bone with this issuance of non voting class C shares further cements my decision to divest while I could as being the right one because really, I want some form of accountability and this stock dividend does nothing to address that.  For those who decide to acquire the Class C shares, it strips of any say in the company.  So it makes little sense for me to be a shareholder when I don’t agree with the management structure in principle to this approach.

Furthermore, all one has to do is compare AAPL and GOOG over specific timeframes beginning from 2004 to see which company has yielded the better returns.   Google’s revenues and profits come primarily from their bread and butter search.  Where is the rest of this innovation which Schmidt, Brin, and Page are talking about?  Where is the return from all the products that Google has in their portfolio?  Contrast this to Apple where they are showing actual solid numbers with Mac’s, iPod’s, iPhone’s, and iPad’s.  In Google’s case, how exactly are those 3 going to be held accountable for their decisions when they hold the majority stake?

Finally, Facebook shares for their impending IPO are also going to be setup this way.  Zuckerberg’s stock that he will receive will have 10 votes per share while those issued to the public will have only 1 vote.  This insures he will maintain majority control.  Zuckerberg is currently the emperor though and the street has to put up with him until the company goes public.  I have a gut feeling though that over time, the pressure for him to perform and meet extremely lofty expectations is going to come to a head, and the street (once the honeymoon is over and once they’ve made their money on the deal), will have a field day should he falter.   In the end though, it’s the usual insider crap where they make off like bandits at the expense of the general public.