If you own Google shares your world is going to rock next week. That’s because “BIG G” is going to distribute a new class of shares to all existing shareholders. That’s going to have a huge impact on share prices in the short-run. Should you sell before it’s too late? Should you buy? We’ll talk about that. But first, let’s try to understand what is really going on.
As of the close of business April 2, 2014 Class A shareholders are going to receive 1 share of Google Class C for every share of Class A they currently hold. The new Class C shares will trade under the symbol GOOG and the original recipe Class A will trade under the new symbol GOOGL. Each share class will trade separately.
The new C Class won’t carry voting rights but who cares. Class A owners have voting rights but they are just about worthless anyway. The co-founders have all the votes and shares they need to call all the shots.
Back to how the distribution is going to work. It may sound complicated but it really isn’t. If you own 100 shares of Google today and don’t sell them, you’ll own 100 shares of Class A shares and 100 shares of Google Class C shares on April 3rd. Two for the price of one. Gotta love it….right?
Well on the face of it this it sounds like a huge gift. And maybe it will turn out that way but watch out over the short-run. Why am I such a party-pooper? Because I can do math.
Google is worth about $380 billion today. How do you derive that figure? Easy. You multiply the outstanding shares (336 million) times the price per share ($1132 per share). If you do the math you’ll come up with the same figure I did – about $380 billion.
If the company is worth $380 billion the day before the distribution, it will be worth $380 billion the day after the distribution too. When Google creates more shares they don’t create value. And if there are more shares floating around but the same core value exists, the price per share is going to have to drop.
Think about a cake that you cut up into 4 pieces. If you decide to cut each of those 4 pieces in half in order to have 8, they have to be smaller than the original. Right? Of course.
It works the same way with a stock split or distribution. All the company accomplishes when they do this is split the same value between more shares and (typically) drop the share price.
Why would Google want to see its share price drop? Because then, more people will be able to afford the shares. That increases the demand and that could drive the price up. This action is purely a marketing event for Google shares. It’s not a strategic move for the company per se.
But don’t misunderstand me please. I’m not saying that Google is bad for taking this action. Many great companies distribute shares. In some cases, the price per share went right back to where it started from effectively creating a 100% return for investors. But it doesn’t always happen that way.
Nobody knows what lays ahead for Google or Google shareholders. When the distribution occurs next week, the price per share is likely to drop. Don’t be alarmed. You might have half the value but twice the number of shares. No problem.
But don’t throw a party either. The price drop might bring a rush of new investors into the market competing for shares and drive the price up. But the core business won’t be changed by this move and that is what will ultimately decide how shareholders do.
Do you own Google shares? Are you excited about the stock distribution next week? Why or why not?