Google just announced first-quarter earnings, and they were solid, beating expectations and quickly reversing a negative trend from last quarter, when Google missed expectations. But what's more important is an announcement that, like Apple, Google is planning to return some of its rather large cash hoard to investors. And what's interesting is how Google intends to do it.
[UPDATE: A commenter, "Finance Gourmet," points out that this isn't a return of cash to shareholders, but the creation of a new class of non-voting stock distributed as a dividend. Correct! I thought Google was going to underwrite these shares out of cash, but on that front I was...confused! by the Drummond note. In fact, this whole thing is really more about retaining voting control of the company than it is about dealing with the cash issue. However, it is a reward or sorts for shareholders.]
Apple, you'll recall, announced a modest dividend combined with a stock buy-back plan. This bucked the wisdom of Steve Jobs, who never wanted to pay a dividend, and flouted the expectation of some observers, who figured Apple might pay a one-time dividend to "solve" its $1 billion cash-on-hand-problem (investors get nervous when a war chest gets too large because they start to think that management will do something stupid with the money).
Google, by contrast, will do an unorthodox stock split — every shareholder will get two shares for each existing share, a "2-for-1" split — with a special category of non-voting stock being created for the purpose. This will allow founders Sergey Brin and Larry Page to continue to control the company. Or, as they put it:
We have a structure that prevents outside parties from taking over or unduly influencing our management decisions. However, day-to-day dilution from routine equity-based employee compensation and other possible dilution, such as stock-based acquisitions, will likely undermine this dual-class structure and our aspirations for Google over the very long term. We have put our hearts into Google and hope to do so for many more years to come. So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world.
And here's the blow-by-blow, from Chief Legal Officer David Drummond:
This is not the usual yada yada… so please read on.
As Larry and Sergey note...the stock dividend we are announcing today will have the basic effect of a two-for-one stock split. Each holder of a share of Class A or Class B common stock will receive one share of the new non-voting Class C capital stock. So after the dividend, a stockholder who currently owns one Class A share with a single vote will continue to own that share plus one Class C share without a vote.
The Class A shares will continue to trade under the “GOOG” ticker symbol, while the Class C shares will trade under a different ticker symbol, so stockholders will be able to trade these shares, just as they can with Class A shares today.
This is not a huge surprise, although the way the split has been set up reinforces the notion that Google is still a founder-powered company that needs Larry and Sergey to really make it work, rather than accepting outside interference. We'll see if this strategy succeeds, as Google matures and faces continued competition, particularly in mobile, where it's strong with Android but could see weakness in its cash cow, ad revenues (that business, right now, just works better in the non-mobile world, where devices can't render ads — search-based or otherwise — large enough).
Anyway, all this cash sloshing around in the Internet/gadget economy has upended the good old way of doing business — and created new challenges for Internet/gadget companies, like Google and Apple, that have always believed that they need to use their cash for innovation and to defend against over-the-horizon competitive threats. This is from Businessweek:
“Decades ago, we used to be worried about companies taking on too much debt,” said Ryan Jacob, manager of the $45 million Jacob Internet Fund, which includes Google shares. “Now, we’re worried about companies taking on too much cash.”