Two of world’s largest technology companies, Facebook and Google, both opted for a dual-class capitalization structure for their respective initial public offerings (IPOs).1 Under this dual-class structure, the public holds Class A common stock with only one vote per share, while an insider’s Class B common stock is entitled to multiple votes per share.2 This allows voting power to remain largely concentrated in the founders’ hands.3 For example, Google executives Eric Schmidt, Larry Page, and Sergey Brin collectively hold 66.2% of shareholders’ total voting power, whereas their Class B stock only represents 31.3% of total shares outstanding.4 Facebook’s CEO, Mark Zuckerberg, controls the company and can issue Facebook shares without a shareholder vote.5 As chairmen, these leaders have a fiduciary duty to maximize the value to their shareholders. An examination of Facebook’s recent acquisition of WhatsApp, however, highlights certain tensions that can arise. One of these tensions stems from the use of the company’s common stock to finance these transactions.
As these tech companies seek to expand into new ventures and take on web conglomerate status, they have increased their volume of acquisitions.6 Many of these acquisitions involve the issuance of Class A common stock, which leads to its dilution, but results in no dilution on the founder’s Class B controlling shares.7 When an acquiring company decides to finance the acquisition by issuing new shares, the shareholder value added (“SVA”)(“the difference between the estimated value of the synergies obtained through the acquisition and the acquisition premium”) drops for its existing shareholders.8 For example, Facebook’s acquisition of WhatsApp amounted to $21.8 billion, only $4 billion of which was cash.9 The remainder consisted of nearly 184 million Class A shares and 46 million restricted stock units.10 Between the time the terms of the deal were finalized and the deal closed, Facebook’s stock rose and, as a result, Facebook ended up paying $3 billion more than if it had paid cash.11
Although many factors impact whether to pay cash or stock for an acquisition, such a lucrative deal for WhatsApp may strike many as outrageous, possibly bordering on negligent. Facebook shareholders have to ask themselves, did such an acquisition maximize my shares’ value? Is this responsible strategic planning or an omen of another internet bubble? Shareholders’ equity is essentially at the mercy of Zuckerberg’s decision making, which could either turn out really great or cost them in the end.
In addition, this strategic decision results in an even more highly dispersed shareholder population and concentrated power in management’s hands. Shareholders are rationally apathetic and in order to challenge management, they must overcome collective action problems and tremendous costs to coordinate12 By issuing 200 million Class A shares in one transaction deal, Facebook exacerbated the collective action problem even further.
Tian Wen, Comment, You Can’t Sell Your Firm and Own It Too: Disallowing Dual-Class Stock Companies from Listing on the Securities Exchanges, 162 U. Pa. L. Rev. 1495, 1496-1505 (2014). ↩
Id. at 1496. ↩
See id. at 1496-97. ↩
Id. at 1498. ↩
Steven Davidoff Solomon, In Facebook’s Deals for WhatsApp and Oculus, Lessons on Stock vs. Cash, N.Y. Times, Oct. 16, 2014, http://dealbook.nytimes.com/2014/10/16/in-facebooks-deals-for-whatsapp-and-oculus-lessons-on-stock-vs-cash/. ↩
Steven Davidoff Solomon, New Buying Strategy as Facebook and Google Transform Into Web Conglomerates, N.Y. Times, Aug. 5, 2014, http://dealbook.nytimes.com/2014/08/05/new-strategy-as-tech-giants-transform-into-conglomerates/. ↩
See Solomon, supra note 5. ↩
Alfred Rappaport et al., Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions, Harv. Bus. Rev., Nov.-Dec. 1999 at 147, 148. ↩
William T. Allen Et Al., Commentaries and Cases on the Law of Business Organization 370-71 (4th ed. 2012). ↩