When Google (NASDAQ:GOOG) came public in 2004, the company’s founders — Sergey Brin and Larry Page — wrote a letter to shareholders that was called an “Owner’s Manual.” In it, they talked about the reasoning for having a dual class of shares, which gave them control over the company. They said that the “standard structure of public ownership” would be harmful to the long-term prospects for Google.
This kind of language should have been scary for shareholders, but few complaints ever followed. After all, Google’s stock is up more than 500% since its IPO.
So this week, Brin and Page made some moves to keep their iron grip on Google. To this end, they created a new class of nonvoting shares for public shareholders. The result “effectively” is a 2-for-1 split that will provide more shares for acquisitions and employee stock option grants — while still giving Brin and Page absolute power over the company’s decision making.
This really is a paternalistic approach. All in all, Brin and Page firmly believe that they know the right path for the company — and that shareholders should have no democratic rights. The irony? They also preach the Internet morality of “openesss” and to “not be evil.”
Which, in a way, is actually similar to how the Chinese government operates. While the country offers some freedoms, the Communist Party has ultimate control on key matters.
But in a democratic society like the United States, Google’s approach really does look like an anachronism. Why should Brin and Page need protections? Steve Jobs didn’t at Apple (NASDAQ:AAPL). In the mid-1980s, he was kicked out of the company, and when he returned, he had little control. His best protection? Creating a world-class company.
To see some of the dangers of a dual stock structure, take a look at Ford (NYSE:F). When the company came public in the 1950s, the Ford family implemented this structure to maintain voting control. While this worked when the company boomed, the approach eventually became a tool for cronyism and bad decision making. And Ford shares got crushed in the 1970s because management failed to deal with foreign competition.
No doubt, in the case with Google, the company will eventually have its own struggles. When it does, shareholders will be powerless.
Unfortunately, a variety of other high-flying Internet companies have taken the same approach as Google. Look at Groupon (NASDAQ:GRPN). The co-founders — Andrew Mason, Eric Lefkofsky and Brad Keywell — represent 57.4% of the voting rights.
Meanwhile, Groupon has been an IPO disaster. Since coming public in December 2011, shares are off 48%. The company is having a hard time fending off the brutal competition and is struggling to even reach profitability.
Groupon also has had two black marks — in the form of restatements — in the past year. The latest came in early April when the company had to revise its fourth-quarter results. The revenues were $14.3 million worse, at $492.2 million, and the total loss was $65 million instead of the originally reported $43 million.
Meanwhile, Mason, Groupon’s CEO, is 30 years old. Now, being a young CEO is not necessarily a problem. Keep in mind that Microsoft‘s (NASDAQ:MSFT) Bill Gates was 29 when he took his company public. But before then, he had managed the company for about 10 years and proven himself to be a strong leader.
Mason still has little experience with managing a company. Consider that he started Groupon in November 2008. While growth has been at hyperspeed, he still had the benefit of raising close to $1 billion before the company came public — which has funded the company’s substantial losses.
Another interesting case of a dual-share structure is Facebook. True, there’s little doubt that Mark Zuckerberg has built a franchise company. And within a couple weeks, he will pull off an IPO that might raise as much as $10 billion, valuing the company at as much as $100 billion.
But after the public offering, Zuckerberg will have 57.1% control over the Class B shares. He also will have the ultimate power to sell the company and replace directors.
Zuckerberg is only 27 years old and already has shown that he likes to make power moves. According to a VentureBeat report, he spent a mere 48 hours to spend $1 billion in a buyout of Instagram. Which isn’t to say the deal won’t wind up looking smart — but rash dealmaking can be extremely risky.
Of course, Facebook shareholders won’t be able to gripe about it. Zuckerberg essentially will be able to do whatever he wants.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.