Not All Shares ARe Created Equal


How many stock tickers are in the S&P 500 Index? Since April, that's become a trick question.

The S&P 500 Index contains 501 ticker symbols. And in 14 months it will have several more.

That's because Google completed a 2-for-1 stock split that created new Class C shares (GOOG; $571) to trade alongside the Class A shares (GOOGL; $578). These new Class C shares lack voting rights, preserving corporate control for Google's founders. Until Google's stock dividend, the S&P 500 only included the most liquid class in its index. The S&P will begin to list multiple stock classes for other companies in September 2015, provided those tickers are liquid. Google's Class A stock is a Focus List Buy and a Long-Term Buy.

Google's founders already held a firm grip on the company by owning nontraded Class B shares with 10 times the voting power of Class A shares. This latest move dilutes shareholder control even further, whittling voting rights to nothing more than a symbolic gesture.

Multiple share classes let company founders maintain control by creating closely held shares with super voting rights even after they have sold off the majority of their economic stake in the company. Historically, media giants such as The New York Times ($15; NYT) and News Corp. ($18; NWSa and $18; NWS) shielded voting rights from investors in the name of journalistic integrity.

This dual-class structure has become popular with the latest wave of technology companies. At its initial public offering in May 2012, Facebook ($63; FB) only sold Class A shares, which carry one-tenth of the voting rights of the privately issued Class B shares. Doing so allowed CEO Mark Zuckerberg to own 18% of the company and hold 57% of the voting shares. LinkedIn ($159; LNKD), Groupon ($6; GRPN), Yelp ($71; YELP), and Zynga ($3; ZNGA) also use multiclass stock structures. Facebook's Class A stock is rated B (average).

Multiple share classes have some merit. They can stop investors from bullying management into decisions that would boost near-term stock performance at the cost of long-term goals. Multiple share classes can also improve liquidity. In May 1996, Berkshire Hathaway launched its Class B shares ($128; BRKb), a lower-priced stock that made the company more accessible to investors than the original Class A shares ($192,400; BRKa). Since their introduction, Class B shares have averaged monthly trading volume 90 times higher than the A shares. Class B shares of Berkshire are rated A (above average).

However, in dual-share structures, corporate control is not proportionate to the economic risk taken by investors, potentially leading to poor corporate governance. Multiple share classes can insulate bad managers from a regime change favored by the majority of shareholders.

Controlled S&P 1500 companies — where one owner holds 30% or more voting shares — with multiple stock classes underperformed over three-, five-, and 10-year periods, according to a study completed in August 2012 by The Investor Responsibility Research Center Institute. These companies also tended to experience more share-price volatility and have weaker accounting controls.

Comcast is a notable exception, at least in regards to stock performance. Like Google, Comcast has three classes of stock. The Class A stock ($53; CMCSa) receives 0.1323 votes per share, while the Class A Special common stock ($53; CMCSk), launched in March 1990, lacks voting rights. The Class B shares, entirely controlled by CEO Brian Roberts, carry one-third of the company's voting power and cannot be diluted. In the past decade, the voting Class A shares have risen 197%, compared to a 195% gain for the nonvoting Class A Special shares and a 82% gain for the S&P 1500 Index. Comcast's Class A voting shares are rated Buy and Long-Term Buy.

Voting rights do hold monetary value. Numerous studies of dual-class shares published over the past 30 years have found that nonvoting-share discounts typically fall in a range of 2% to 6%.

On a companywide scale, that premium can be significant. In 2010, Magna International ($109; MGA) shareholders valued the voting rights of the Canadian auto-parts maker at nearly $1 billion. To eliminate the company's dual-class structure, investors paid $300 million and 9 million common shares to a trust controlled by Magna founder Frank Stronach. At the time, the trust held just 0.6% of Magna's equity but 66% of the voting rights. Magna is a Focus List Buy and a Long-Term Buy.

For Google, a vote is currently worth an extra $7 per share, a premium of roughly 1%. Since the split, Google's Class C shares are flat, while the Class A shares are up 1%. To keep the prices of the Class C and A shares from drifting too far apart, Google vowed to compensate Class C shareholders with a combination of cash and stock if the Class C shares trade more than 1% lower than Class A shares on average during the first 12 months after the split.

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