I was reading a story yesterday on how Google was giving all its employees a 10% raise next year. In that story it was mentioned that Google’s stock was around $615 a share. That seemed outrageously high to me, but I checked online today and sure enough, shares were trading at $610/share this morning.
What does Google gain by having such expensive shares? Why not do a split to reduce the cost and perhaps get more investors to buy their stock?
I don’t know their rationale, but Google is far from being extreme here. A famous example for a corporation with an enormous share price is Warren Buffett’s holding Berkshire Hathaway. It currently trades at about $120,000 a share - they’ve never made a share split, and they have never even paid dividends (they do have, however, B shares with different voting rights, and those have been split).
Here (PDF) is an “owner’s guide”, written in the form of a letter from Buffett to shareholders, elaborating on Berkshire Hathaway’s unorthodox (in that respect) policy.
I’ve always been surprised at this too. The only guess I can make is Google is just an idea.
If you have something like GM, you can kind of put a value on that. You can say, inventory has so much worth, put a price on brand recognition, how much could the office furniture be sold for, etc, etc. You can even put a bottom line price, like how much could a new car be sold for scrap metal.
But Google is intangible. They are selling an algorithm and idea a way to sell stuff, possibly.
How do you estimate any kind of value on it. Well you certainly can, but it’s my guess it is subject to so many opinions, and idea is just valued at just that, whatever people think it’s worth.
Because a company is deemed to be worth the sum of the value of all outstanding shares (market capitalization). It doesn’t matter much what each individual share is worth. Someone investing $25,000 in Google doesn’t care if there are 320 million shares at $300 or 640 million shares at $150. It’s all the same. It really only affects people that like to buy a single share so that they can get a pretty stock certificate (which wastes a company’s money).
Sometimes when companies split, it’s to give the illusion that they’re more affordable, but market cap is market cap. Because lots of small traders don’t understand this, a stock split can cause the (split) price to rise immediately following the split, because (a) a split is a sign that the stock has been going up, meaning (b) it will keep going up, thus causing (c) a flurry of buying activity causing the post-split market cap to actually go up. If the company holds a lot of its own stock, it could be a money maker.
Berkshire Hathaway-B did have their first split in January. They’re at about $80/share, but the split was 50-1 so it was a multi-thousand dollar stock previously.
$600 isn’t a whole lot of money when you’re considering investing. If you consider the time you spend tracking your stock picks as labor rather than fun, when you add those up plus trading costs you’re not making a whole lot of money even if the price goes up. If you have less than $600 to invest, you’re better off paying off loans or putting more money into an IRA.
Which isn’t to say they’d see no benefit from a stock split, it’s just that it would come in the form of being able to buy a few more previously-fractional shares rather than in the form of some investors being totally shut out of buying Google. If they have less than $600 they have no business investing in individual stocks in the first place.
Now, if it’s in the range of Berkshire Hathaway B (to say nothing of A), then I’d consider it a true barrier to the small investor who wants to individually pick several stock to put several thousands of dollars in apiece, but cannot because the individual price is too high for one share.
The question isn’t about market capitalization. The question is why do Google shares trade in the $600 range, instead of splitting and keeping the share price at a lower price point.
I think lots of small traders have very rational reasons to prefer low-value shares, and that would also be beneficial to the company. Say I have exactly a thousand dollars to invest - not more. Since I can’t get a fraction of a share, I could buy one Google share, leaving the remaining $400 uninvested, or placing them elsewhere.
If Google had ten times the number of shares, trading at $60 each, I could buy 16 shares, investing $960 and leaving only a meagre $40 uninvested. Low share prices make it much easier for small traders to invest the amounts they deem ideal. Sure, your $25,000 big guy wouldn’t care too much (although even for him, the difference between $600 and $60 shares would mean $400 versus $40 left uninvested), but some companies intentionally target small investors.
Page and Brin are influenced by the management style of Warren Buffett (see Google’s IPO letter, for instance). Warren Buffett has typically shunned stock splits because he wants shareholders to be invested in Berkshire Hathaway for the long term; he is looking for value investors who share his investment philosophies. A higher stock price tends to decrease share liquidity, thereby discouraging short-term trading.
Page and Brin have voiced similar sentiments about seeking investors who are in it for the long haul and wish to invest in a company with a stable structure. It’s likely their views on stock splits are similar to those of Buffett’s.
Hence my guess that it is because they don’t want small investors.
Perhaps they fear that small investors would be more prone to thought process along the lines of “Ahh, I like engine X better, I’ll buy that.” whereas large investors better understand their business model?
Well…technically they could lower the stock price without doing a split by giving out huge raises, giving every employee a foosball table, and generally investing in projects and “ideas” that have nothing to do with their core business and won’t ever pay for themselves…
Oh wait! 
Thanks for all the fine responses.
I’ve quoted the last part of Balthisar’s answer above, and it got right to the core of why I thought $600/share was really too high. Why wouldn’t most any company do a stock split when their per share price became really high? (And of course I know that “really high” is a subjective judgment.)
What’s the downside of a stock split, from the company’s perspective?
The main downside is what happens if the stock goes down. Some of those early dot-come companies did stock splits as they went up in value. Then, when they declined in value, they had to do reverse splits. So they went from $!0 to $100, split back to 10, then went down to $0.20 and reverse split back to $10. Reverse splits look really, really bad to the market.
But there is a perceived advantage in high prices that discourage small investors. Small investors have different objectives than large ones, so the stock price may respond differently to market and world events. Tons of small investors also means tons of small dividend checks, which do have a real cost to the company.
That doesn’t make a lick of sense. The market has put a very tangible and exact price on Google - $193.4 billion (as of this posting). The value of Google would still be $193.4 billion if they did a 10:1 split to make their shares worth $60.49.
As Caldazar notes, a lower stock price encourages short-term trading. Stock with voting rights that are owned by short-term traders encourage the operation of the company to align with the desires of short-term traders, which might not be good for the long-term viability of the company. Additionally, stockholders with desires of short-term gains might be more willing to join a shareholders’ lawsuit against the company than stockholders who desire the company’s long-term viability.
Right, although Google management insulates itself from this to some degree with its two-tiered class structure. Google management owns Class B stock; it is similar to the Class A stock traded on the exchanges except that:
-A share of Class B stock grants the owner 10 votes, while a share of Class A stock grants the owner 1 vote
-Class B stock cannot be traded on exchanges
-A share of Class B stock can be converted into a share of Class A stock, but not the reverse
As of the last quarterly report, Class B stock comprises 22% of all outstanding shares but makes up 74% of the total voting power. Still, your point is valid in general.
I don’t really buy the argument that Google’s price keeps short-term traders away. Since its IPO Google has been one of the most popular stocks to day trade. It remains that today.
I had a phone interview with Google a few years ago, and early on I was told that Google is an advertising company. Their model to make money is to selectively target ads to people based on the contents of either their search or what website they are on. Companies that advertise like the idea that their ads are going to people more likely to be interested in their products. Yes, they do a lot more than deliver ads to people on the net, but I think that is where most of their money is coming from.
And I did not get the job. About five minutes in, both me and my interviewer realized it probably wasn’t a good fit. We continued to talk for a bit, but I heard no more from them after that.
The easier, and more investor-friendly option, would be just to pay out a one-off huge dividend. It would lower the share price while not hurting shareholders - they would still have the money, it would simply not be tied up in the share any more.