(Reuters) – Google Inc announced a stock
split designed to preserve the control of co-founders Larry Page and Sergey Brin over the world’s No. 1 Web search engine,
asking investors to trust their long-term vision.
The surprise decision, which its board unanimously approved, came as the company
exceeded Wall Street’s profit expectations but revealed a worrying 12 percent drop in search advertising rates – the second
consecutive quarterly decline.
Shares of Google, which finished Thursday’s regular session at $651.01, rose to $653
in after-hours trading.
Google’s corporate structure, which gives the founders majority voting control of the
company, has been emulated by later generations of Web sensations such as Zynga Inc and Facebook. But the stock split goes
even further by ensuring that the founders’ voting heft will not be diluted over the long term.
The news came just as
Page completed a year in the chief executive’s seat for the second time, during which he spearheaded the planned $12.5
billion acquisition of Motorola Mobility and launched a social network to take on Facebook.
With competition heating
up in the Internet market and gadgets such as smartphones and tablet personal computers reshaping the technology landscape,
many investors are trying to figure out how Google’s business will be affected.
Google delivered a healthy
first-quarter profit, with net income growing to $2.89 billion from $1.80 billion in the year-ago period.
Earnings of
$10.08 per share, excluding certain items, surpassed the $9.65 that analysts had predicted – a source of relief to investors
after a rare earnings shortfall in
the previous quarter.
“The questions are not really the numbers around the quarter. The questions are much more
higher-level strategically,” said Macquarie Research analyst Ben Schachter.
He cited concerns around the pending
acquisition of Motorola which will put Google in the hardware business – an area it has no experience in, with much lower
profit margins than its online ad business.
Google executives did not address the Motorola deal, which is expected to
close in the first half of this year, during the conference call with analysts on Thursday.
But Google CEO Page
defended the company’s philosophy of focusing on long-term goals that can take years to pay off, citing successful past “big
bets” such as the purchase of video site YouTube for $1.65 billion and the development of its Android mobile software, now
the world’s No.1 smartphone operating system.
The best way to keep finding the big opportunities, Page said, is to
maintain the special corporate structure that gives him and co-founder Sergey Brin 56.7 percent of the voting
control.
“By investing in Google, you are placing an unusual long term bet on the team, especially Sergey and me, and
on our innovative approach,” Page said.
Google said its board of directors has approved a new type of special
non-voting “Class C” shares which will ensure that Page and Brin’s control doesn’t get diluted as the company issues new
shares for employee compensations and acquisitions.
The dividend, in effect, works like a 2-for-1 stock split:
Investors will get one share of the new “Class C” stock for each existing Google share. The price of Google’s current “Class
A” shares will be halved when the new Class C shares are issued and listed on Nasdaq under a separate ticker.
“I
can’t think of another example where a company created an additional class of shares and issued them to existing
shareholders,” said Bob McCormick, chief policy officer at Glass Lewis, an independent proxy advisor. But he said the move
simply perpetuated a system that shareholders had agreed to when Google went public eight years ago.
AD
RATES
Google executives said the company continued to gain ground with large advertisers during the first quarter,
particularly for the display ads on its YouTube site and for mobile ads.
Analysts homed in on Google’s second
consecutive quarter of declining rates for its search ads, known as its cost-per-click (CPC). Some investors fear that may
signal a worrisome trend for Google as consumers increasingly access the Web on smartphones, whose search ad rates are lower
than for desktop PCs.
“You have another quarter with a disturbing drop in click prices,” said BGC Financial analyst
Colin Gillis. “OK, paid clicks are up but people are paying less for them. We had smartphones before the December quarter. If
we want to blame it all on smartphones, that’s a little disconcerting.”
Google Finance Chief Patrick Pichette said
CPC rates fell on a variety of factors, including ad format changes and international expansion. He pointed to 39 percent
surge in the total number of clicks by websurfers on the ads, and said he was “bullish” about a rise in mobile ad
rates.
Net revenue, excluding fees paid to partner websites, totaled $8.14 billion in the quarter ended March 31,
compared with $6.54 billion in the year-ago period and analysts’ average estimate of $8.15 billion according to Thomson
Reuters I/B/E/S.
Page also cited recent improvements to the Google+ social network, which he said will help bolster
the overall experience of all of Google’s Web properties while also serving as a “destination” site.
Google’s
10-month-old social network has more than 100 million active users compared to Facebook’s 845 million users.
Hinting
at the competition from Facebook, which is slated to launch an initial public offering next month that could value the
company at $100 billion, Page said Google needed to operate with the “soul and passion of a startup.”
(Editing by Richard Chang and Edwin Chan)