Google Proposes Changing Stock Structure to Keep Control

Google Inc., the world’s largest Internet-search company, plans a new stock structure that gives management more leeway in issuing shares, while letting it keep control over the direction of the business.

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. Google announced the move as part of its first-quarter financial results, which met or beat most analysts’ estimates, boosted by online-ad spending.

Google aims to prevent employee stock compensation and stock-based acquisitions from diluting the voting power of its founders. The Mountain View, California-based company wants the flexibility to be able to make long-term investments, using its shares, without the risk of losing control. The move builds on Google’s dual-class stock structure, created when the company went public in 2004, that already limited investor influence.

“We have put our hearts into Google and hope to do so for many more years to come,” Chief Executive Officer Larry Page and co-founder Sergey Brin said today in a statement posted online. “ So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world.”

First Quarter

First-quarter profit, excluding certain costs, was $10.08 a share, the company said on its website. Analysts had projected $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.

Page, who became CEO a year ago, has pushed Google deeper into display advertising and mobile services. This year the company will account for 16.5 percent of the U.S. market for display ads, which include banners and videos, according to EMarketer Inc. By next year, Google is projected to grab almost 20 percent, unseating Facebook Inc. as the market leader.

“The viability of Google is still very, very strong,” said Ron Josey, an analyst at ThinkEquity LLC in New York. He recommends buying the stock, which he doesn’t own himself. “There’s still a lot of room for growth across its multiple businesses.”

Google’s shares were little changed in late trading after the announcement. They had risen 2.4 percent to $651.01 at the close in New York.

‘Google’s Story’

The desire to maintain control has always been a driving force at Google, said Colin Gillis, an analyst at BGC Partners LP in New York.

“That’s been Google’s story,” he said.

While the new proposal will be subject to a vote at Google’s annual meeting on June 21, Page, Brin and Chairman Eric Schmidt control the majority of voting power.

“We expect it to pass,” David Drummond, Google’s chief legal officer, said in the statement.

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. Unlike with a typical stock split, though, voting power in the company won’t change, said Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance.

“A true stock split would give the holder a share with the same voting right as the share they held,” Elson said. “This is more of a stock dividend.”

Google Paranoia?

Paul Hodgson, a researcher at GovernanceMetrics International Inc., a corporate-governance consulting firm in New York, said the approach isn’t ideal because it puts unnecessary limits on shareholders.

“That is anti-best practice as far as best governance, but so was the dual-class structure in the first IPO,” Hodgson said. “There are plenty of companies that have a single class of shares, one vote per share, and they aren’t paranoid that shareholders are going to somehow influence the future strategy of the company.”

Page and Brin said they recognize that some people won’t support the change.

“We understand that other companies have been very successful with more traditional governance models,” they said in the statement. “But 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.”

Cash Holdings

Some investors have been asking Google to consider a cash dividend or a stock buyback. The company has $49.3 billion in cash and short-term investments, up from $44.6 billion in the previous quarter.

When asked why Google isn’t returning cash to its shareholders, Chief Financial Officer Patrick Pichette said the money could be used for strategic investments, such as the planned $12.5 billion acquisition of Motorola Mobility Holdings Inc. He said there were nothing new to announce on that front.

Google still gets most of its revenue from Internet-search ads -- the text links that appear in query results. The average cost per click declined 12 percent in the first quarter after falling 8 percent in the fourth quarter. The number of paid clicks rose about 39 percent.

The company posted first-quarter net income of $2.89 billion, or $8.75 a share, compared with $1.8 billion, or $5.51 a share, a year earlier.

Mobile search ads have become a bigger piece of Google’s business. Companies will probably commit 23 percent of their search-based ad spending to mobile devices by the end of this year, according to Marin Software, which helps manage about $3.5 billion annually in online ads. That’s up from 8.7 percent at the end of last year.

Click Activity

Users are clicking on these ads more aggressively, Marin Software found. It expects mobile devices to account for 25 percent of all user clicks on search ads by the end of this year, up from 12.3 percent at the end of 2011.

Including both mobile and desktop-computer searches, Google had 76 percent of spending on query-based marketing in the first quarter, according to Covario Inc., an online advertising company. Microsoft Corp. and Yahoo! Inc., which are Internet-search partners, had 13 percent during the period.

Google is playing catch-up in the social-networking market, meanwhile, by promoting Google+. The service, introduced last year, is designed to let users easily share content by grouping acquaintances into “circles.” Google+ now has more than 170 million users, the company said this week.

Still, Google has struggled to keep users engaged. In the U.S., Google+ visitors spent an average of 3.3 minutes on the site during January, compared with more than 7 hours for Facebook.


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