sean o'reilly: stock splits are debatableno matter how you slice it, on this tech edition of industry focus. greetings, fools! sean o'reilly here at fool headquarters in alexandria, virginia. it ismay 6th, 2016. friday! tgif! in the studio with me to talk about all things tech, asalways, is dylan lewis. what's up, man?
apple share price before split, dylan lewis: not too much, sean. nice to beback. we had a little break last week, because i was hosting with nathan on the show. o'reilly: how'd you do with the chair switch? lewis: i sat in your chair, the host chair,and he sat over here.
o'reilly: was it weird?lewis: it was different. o'reilly: good show, by the way. lewis: i realized the camera was getting myright side rather than my left side. o'reilly: is that your better side? lewis: i don't know, you'd have to ask theviewers. o'reilly: write to us at industryfocus@fool.comto tell us which side (laughs) is dylan's good side. lewis: there it is, the email plug. now wecan get on with the show. o'reilly: we're talking about not necessarilya tech theme today, but, it obviously affects a couple of tech companies, which we'll betalking about. we're talking about stock splits.
dylan, for our listeners who may not know,what is a stock split? lewis: a stock split is basically, if youthink about a company's value and their ownership as a pie, stock splits take that pie, and,if it's cut into 1/8ths to start, it cuts it into 1/16ths.o'reilly: what kind of pie is it? lewis: i like to think it's a pecan pie. o'reilly: pecan pie. (laughs) lewis: so, if you owned 1/8th of that pie,and it was a two-for-one split, you would now be getting two slices of 1/16th pie. o'reilly: (sighs) why do people do this, dylan?(laughs)
lewis: there are a couple different reasonscompanies do it. some of them i put credence in, and some of them i don't, personally.but the idea here is, you're making your shares slightly more accessible to the average investor,because the overall value of the company doesn't change, and you're just getting smaller slices.say you're currently trading at $100 a share. if they do a two-for-one split, they're nowtrading at $50 a share, and you have two shares in your account. o'reilly: what's your opinion on that? everybody'sfavorite example of this is warren buffett's berkshire hathaway. not everybody has $200,000to just buy one share of something. what do you think about that?
lewis: i think there's something to be saidfor keeping your share prices high, and having people who are buying and holding and notmoving in and out of positions. i think it does attract a certain type of investor. ido think it's a nice when companies decide they want to make their shares more accessibleto the average investor. tim cook, when apple split seven-for-one, said, "we're taking thisaction to make apple stock more accessible to a large number of investors." he made itplain and simple that that was part of the motivation for it. one of the other things people will cite is,it does increase liquidity, if for some reason you're seeing wide bid-ask spreads -- whatpeople are willing to sell for versus what
people are willing to buy for in brokerageaccounts, or the brokerage teams that pair those up. you'll see those spreads tightenup. o'reilly: that seems like kind of a dubiousclaim today, because of the proliferation of technology in the financial industry. alltrading is done by algorithms. lewis: especially because most companies thatare splitting, already have a pretty big daily active volume, and it's not something thatwill dramatically change that. so i don't know how much i believe that. but, the lastline of thinking -- and, again, this is one that is not super relevant, maybe, as muchanymore, but board lot thinking and the strategy there. a board lot is the standardized numberof shares as defined by a stock exchange as
a trading unit. basically, you think aboutsome of these big institutional moves and brokerage moves that happen. the purpose ofthese board lots is to avoid odd amounts of shares. if everyone is working in these 100share denominations, typically, then you won't wind up with these weird 83 share lots thatno one wants. it makes it easier to get a collection of 100 shares for that board lotif the share price is lower. o'reilly: got it. seems like that would havebeen more of a problem 30 years ago, again. lewis: right. i actually have a great datapoint and some questions to ask that tie into that a little bit. this is kind of an interestingdata point i came across in researching this show. from 2008 to 2013, only twelve s&p 500companies on average split their stocks each
year. this is data coming from s&p dow jonesindices. by comparison, in the 90s, an average of 64 companies in the s&p 500 split theirstocks each year. in 1997, there were 102 total stock splits. o'reilly: wow. the proof is in the pudding,yeah. lewis: i have a couple theories as to whystock splits are going down. before i name any of them, sean, do you have any guessesor thoughts? o'reilly: i peeked at yours, they're verygood. the other theory i have is, warren buffett has become a huge part of the american nexus,and he's become increasingly influential in the last 20 years, with all these books, andhe's just everywhere. he's basically a household
name now. another instance where he kind ofsaid this was silly was tech companies, in the early 2000s, and actually coca-cola too,they weren't expensing stock options on their income statements. they were giving millionsof dollars to employees, but they weren't expensing them on income statements, and buffettwas like, "that's silly. it's hard to calculate the value, i'll grant you, and that's fine." lewis: "but you need to account for that somehow." o'reilly: yes. and not only did coca-cola,which he owns 9% of, do it -- and that was actually the first s&p 500 company to expensestock options, i believe. if it wasn't the first, it was one of them. but, he actuallygot his buddy, bill gates, to do it at microsoft.
they were the first big tech company. so,i couldn't prove it, but i would throw out buffett being part of the american nexus andhis thoughts on the matter. he does not believe in share splitting, he wants long-term partnershareholders. i would throw that as a hare-brained theory of mine. (laughs) lewis: a couple thoughts i had on it. oneof them, you look at the time frame this was cited -- and i grabbed this from a wall streetjournal article -- that 2008 to 2013 range, that's mid- to post-financial crisis. o'reilly: they were doing reverse stock splits,more likely. (laughs) lewis: yeah, you might just see companieswanting to stay stable, and not rock the boat
with anything crazy on the corporate governanceside. one of the other things, i think, to your point about technology, you have onlinediscount brokers, which make building positions much cheaper. you look at some of the veryexpensive tech stocks right now, like google. if you want to buy one or two shares, rightnow, you can do it and pay a $7 commission. the expenses are not a huge portion. o'reilly: right. in fact, that's $7 flat,so it doesn't matter. lewis: right. whereas, maybe in the early90s or so, the cost of making those types of trades and position building and dollar-costaveraging was a little bit more expensive. the one other thing i think might be contributing,maybe not quite as much, is the widespread
availability of fractional shares. the ideathat people do not need to buy an entire share of google. there are a whole bunch of platformsout there where you can buy parts of a share of google.o'reilly: the wonders of modern technology. lewis: yeah. so, those are some of the reasonsi see. i think, largely, companies are not as tied up in the idea of making it as accessibleto buy shares. i think there's something to that idea of building more of this buy andhold company type pressure. that's what alphabet did. that's what we're moving towards. andthere's a lot of buffett influence there. o'reilly: when do you think investors shouldcare about a stock split? when will it affect their lives?
lewis: to go back to that metaphor, the pieis the same size, and you're just slicing it differently, and you're owning that sameportion. sometimes, there are instances where it's not just-- o'reilly: one of the slices gets to vote alot. (laughs) lewis: basically, you wind up in these situationswhere, "we're slicing the pie differently, but i'm telling you what the pie's going tolook like." (laughs) or, "i'm going to tell you what the pie is made out of." o'reilly: (laughs) "one of the slices hasall the pecans." lewis: yeah. you're seeing a couple reallyhigh profile examples. under armour is one
in the tech space. but, some stock splits,more recently, have been used to issue new share classes. and those new share classesdistribute the economic value of the split, but they don't necessarily have the same rightsas the previous shares did. our lead-in for the show, and why we wanted to talk aboutthis, is facebook's proposed split. this is something that came up in their conferencecall. if you checked out facebook's conference call, you would have heard, "pending stockholderapproval. we intend to issue two class c shares as a one-time stock dividend for each outstandingclass a and class b share, resulting in a tripling of the pre classification total sharesoutstanding." o'reilly: hmm.
lewis: that's from david wehner, the cfo ofthe company. o'reilly: who owns all those class b shares,dylan? lewis: (laughs) you want to take a guess? o'reilly: oh, i know who. (laughs) lewis: (laughs) yeah, so, right now-- o'reilly: his name rhymes with muckerberg. lewis: facebook already has two classes ofstock, a and b shares. they were created when the company went public. the idea there was,they wanted mark zuckerberg to retain ownership of the company. class a shares each have onevote. mark zuckerberg owns a pretty small
percentage of them, actually, i think about4 million of the 2.3 billion outstanding. tiny. class b shares, on the other hand, have10 votes each. he owns 468 million of the roughly 550 million outstanding.o'reilly: yeah. lewis: so, 85%. all told, he owns about 15%of the company, but wields like 60% of the votes. o'reilly: the proposed issuance of the twoclass c shares and everything, pending stockholder approval, that's definitely going to happen,because he controls 60% of the voting power of the company. lewis: it will probably happen, yeah. it'dbe crazy for it not to. o'reilly: unless he accidentally hits theno button or something.
lewis: so, how does this all tie in? again,from the company's conference call, "this structure will allow for the preservationof the voting structure that has served the company well today, while allowing mark tofund the chan zuckerberg initiative over the course of his lifetime. importantly, as partof this proposal, the preservation of the multi-class capital structure would generallybe predicated on mark continuing to maintain an active leadership role in facebook." forlisteners who might not know, the chan zuckerberg initiative is mark and priscilla chan, hiswife, llc. it's not a non-profit, but it is slanted towards a non-profit type mission.the idea there is advancing human potential and promoting equality in areas such as health,education, scientific research, and energy.
o'reilly: he's more or less doing what gatesdid, just a little bit younger, with the bill and melinda gates foundation. lewis: exactly. so, earlier in the year, theycommitted to donating 99% of the value of their facebook shares. he said he's not goingto sell more than 1 billion over the next three years, but for him to do that, basedon his current ownership, he'd hit a point where he'd be selling very valuable shares. o'reilly: in terms of voting rights.lewis: right. so, if you look at what is effectively a three-to-one split, he will be receivinga ton of shares, (laughs) over 900 million shares, to work with. he will then be ableto transfer the non-voting class c shares
to those-- o'reilly: the foundation. lewis: the foundation, the llc, and maintainthat ownership. o'reilly: got it. lewis: and this is very similar to what underarmour looked to do with their c shares. the idea there was, kevin plank is at the helm,and he wants to maintain ownership of the company. o'reilly: it seems like companies wind updoing stuff like that just so the founder can spend some of their money. you look atlarry ellison over at oracle, he owns one
of the islands of hawaii, and he races supercrazy yachts. lewis: doesn't sound like he's giving 99%of his shares away. o'reilly: no. it was interesting to me, idon't think he's ever really sold his original shares in oracle. but what he did, insteadof doing different share classes or whatever, is he just gets a ton of stock options everyyear. lewis: oh, he's written in crazy grants, right? o'reilly: yeah. there's that, and then obviously,you have buffett, who waited until he was 80 to start giving his money away, and thenit doesn't matter. really the only outlier there is gates, that i can think of, becausehe's just selling his shares. he actually,
it happened a year ago, ballmer actually ownsmore of microsoft than gates. lewis: wow.o'reilly: isn't that crazy? lewis: yeah, i didn't know that. o'reilly: i remember going to the librarywhen i was like 16, and reading the value line investment survey, and one of the pagesin it is major insider sells, and they send it out every month. every month, like clockwork,for like 15 years, gates has been selling 20 million microsoft shares. anyway, bottomline, stuff like this always kind of leaves a bad taste in my mouth. lewis: yeah, there's that weird tinge of,"i know what you're doing, and i think it's
right." because, if you're on facebook shareholder,you believe in mark zuckerberg, and you believe in his vision of the company, and you wanthim at the helm. i can't think of anyone else you'd rather have running that company. so,you want him locked up, and you want a corporate structure that gives him the opportunity towield ownership as he sees fit, and steer the company towards the initiatives he wantsto be working on. o'reilly: on the other hand ... (laughs) lewis: it does have that weird taste to it,though. if you own facebook and you don't want zuckerberg at the helm ... o'reilly: why are you buying it?lewis: yeah, why do you own them?
o'reilly: it just seems to me, stuff likethis, these complicated, convoluted ownership structures, long-term, they kind of muck thingsup a little bit. lewis: yeah. and there has actually alreadybeen a class action lawsuit filed by a shareholder claiming that this moves gives zuck-- o'reilly: did that happen about five minutesafter this announcement was made? lewis: yeah, it was (snaps) like that. theyclaimed the move gives zuck entrenched control without him having to give up anything, andthat's kind of problematic. and, from a corporate governance standpoint, i understand that argument.but, it's really one of those things where, if you believe in him as a leader, and you'refollowing him as an investor, then you really
shouldn't worry all that much about it. o'reilly: you also brought up a good pointwhen we were walking down here. this also kind of protects them from crazy corporateraiders. lewis: yeah.o'reilly: i appreciate that. lewis: if he maintains more than half of thevoting rights for the company, he can pretty much do whatever he wants. you're not goingto have someone really vocal like ackman or icahn come in and tell him what he needs todo. o'reilly: right, and then they'll sell a yearlater, because i don't actually care about the long-term company or something.
lewis: yeah, and it's something they talkedabout a lot in the conference call, that they were making several long-term bets, and theyfeel a lot of the big risks they were taking, more of them are in front of them than behindthem. and, having an entrenched ceo that is also someone who owns a ton of the companyand can do what he needs to do, sets you up to make some of those bets and make you lesssubjected to these more short-term, medium-term mindsets that are out there. so, people who are interested in followingup on this, stay tuned. there's going to be a vote in the annual shareholder meeting onjune 20th, and that will determine whether or not it passes.o'reilly: it will.
lewis: i'm guessing it probably will. (laughs)but, more to come on that. o'reilly: to round things out, when shouldwe not care about stock splits? lewis: yeah ...o'reilly: every other instance? lewis: yeah, basically, when none of the aboveapplies. if it's not materially changing the corporate ownership structure, if you aresimply getting two shares of the same share class for one that you owned before, thenit's probably not much of a big deal. reading financial media stuff, i'm sure you see thistoo, i'll see things like, "amazon should split its stock because it's expensive, andpeople should buy it." o'reilly: do you feel richer with a $10 bill,or two $5s?
lewis: yeah. and you'll see the argumentsthat are like, "well, psychologically, someone believes that a $100 stock could go to $200much more easily than a $500 stock could go to $1000." it's like, well, that's not howgrowth works, you know? it's the same growth percentage either way. so, i don't know, iwould just ignore that kind of noise. o'reilly: the only other time i could thinkof where it would matter was it was being done for reasons such as an acquisition. berkshirehathaway has class b shares that are 1/100th, so they're traded for $2,000-3,000, then classa is $200,000. and they were actually done so berkshire hathaway could buy ... americangeneral insurance? anyway, they bought another insurance company in like 1999. it was a stock-for-stockdeal, and they were like, "we can't chop up
$100,000 share price," so they had to issuethe class b in order to make that possible. lewis: yeah, that's when you need it. o'reilly: but, obviously, the event thereis the merger, not the actual split. cool. alright, dylan, thank you for your thoughts.lewis: always a pleasure, sean. o'reilly: have a good one. if you're a loyallistener and have questions or comments, we would love to hear from you, just email usat industryfocus@fool.com. again, that's industryfocus@fool.com. as always, people on the program may haveinterests in the stocks they talk about, and the motley fool may have formal recommendationsfor or against those stocks, so don't buy or sell anything based solely on what youhear on this program. for dylan lewis, i am
sean o'reilly. thanks for listening and foolon!
