With just a quick glance at the headlines, it would appear the recently-announced stock split plans for Under Armour (UA) is nothing more than the relatively common practice of keeping the price of shares low and/or increase the size of the float.
When one takes a closer look at the details of the upcoming Under Armour stock split, though, a couple of red flags start to wave.
The biggest red flag of all is the fact that this isn’t actually a stock split. A stock split is tantamount to exchanging a $20 bill for two $10 bills — the owner of said cash still effectively holds the same value.
Owners of UA won’t be getting two lower-priced shares of the same UA they own right now, though.
Their current shares include voting rights, which allows them to pick who they want to be on the board of directors … aboard that ultimately chooses the company’s management team. The shares they’ll be receiving as part of the Under Armour stock split are nonvoting shares, meaning they’ll have less of a say if and when the time comes to select new board members.
If it seems like an underhanded move ultimately designed chip away at shareholder power, that’s because it is.
Details of the Under Armour Stock Split
Two classes of UA stock are already in the float:
- Class A shares of Under Armour stock are the traditional type of share, where one share equals one vote. There are 179.4 million shares of Class A UA in the float (as of March 31), most of which is held by individual investors and institutions.
- Class B shares of Under Armour stock also give their owner voting rights, but with a twist. Every share of Class B UA shares gives its owners 10 votes in matters that require voter input, versus the one vote that Class A shares reflect. Granted, there are only 36.2 million Class B shares. On the other hand, one person — CEO Kevin Plank — owns every single Class B share, which easily gives him majority control of the company.
The so-called “split,” which will be put to a vote on August 26th, will grant each owner of Class A and Class B shares one share of Class C Under Armour stock for each A or B share they presently own. Although the value of their total position should theoretically remain unchanged, the Under Armour stock split will soon mean shareholders own two distinctly different investments in UA.
Is It Legal?
To answer the most common question the planned Under Armour stock split is apt to prod … yes, it’s legal. It might not feel fair or ethical, but if the majority of UA shareholders agree to it, there’s no reason it can’t happen as Plank has planned.
To answer the next most likely question, this all seems vaguely familiar because Google (GOOGL, GOOG) did the exact same thing in 2013. Shareholders grumbled then too, for the same reason — such a structure of nonvoting shares ultimately means the organization’s CEO can effectively ensure he remains at the helm regardless of his performance.
Make no mistake about it, though — the concentration of voting rights isn’t a mere side effect of a larger structural overhaul. As was the case with Google, the intent with this proposed plan to issue nonvoting shares is a plan put into place by Kevin Plank to ensure he maintains control of the company. As Plank expressed in his letter to UA shareholders yesterday:
“The Board has agreed that maintaining our founder-led approach is in the best interests of Under Armour and all of its stockholders.”
Of course, Plank didn’t mention that with his Class B shares he essentially has the power to hand-pick the Board’s members … and remove them.
Bottom Line for UA
While questionable on the surface, the proposed Under Armour stock split may be a situation shareholders would be better off just living with than fighting … at least for the time being.
Whether the so-called split is fair or not, there’s no denying Plank has made Under Armour a great company, and UA has been one of the market’s more rewarding stocks since it went public in late 2005. Shares have gained more than 1,000% in less than a decade as a publicly-traded investment. He’s clearly doing something right.
Investors who have a fundamental problem with the premise of the split might be better off simply cashing out rather than putting up a fight.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
