In the wake of Google’s attempt to allow founders Larry Page and Sergey Brin to maintain control of the company through a split of Google’s stock, we wanted to give you some expert reaction on the matter.
Aaron Klein, CEO of Riskalyze, explains the conventional stock split, how Google’s splitting of its stock is different, how it affects new and current investors, and why a potential acquisition of Twitter is not out of the realm of possibility.
Mitchell Weiss, professor of Finance at the University of Hartford and author of Life Happens: A Practical Guide to Personal Finance from College Through Career, had this to say regarding the split —
I saw the news about Google and read that they’re issuing non-voting shares, which they say they intend to use for employee stock plans and potentially acquisitions. Splits are done for a variety of reasons: to diversify the investor pool (lower price attracts more buyers), to garner media attention when the split’s being done by a high profile company (such as Google) and also to potentially obfuscate potential earnings per share difficulties down the road. That’s because when more shares are outstanding, the denominator in the EPS ratio increases, which is then being divided into the same earnings numerator. Consequently, the result is lower. Soon after the split, the analysts and business reporters will normalize the EPS for comparison purposes, but that’ll trail off over time. Google’s under pressure because it’s earnings per click have declined somewhat. If this turns out to be a continuing trend, the mechanics of the split can help them.