Google’s expected stock split has focused attention the treatment of multiple share classes in the S&P 500 and other indices. Most US companies, but not all, have only one class of common stock and each share is entitled to one vote. In some companies with multiple share classes, one class is publicly traded and the other classes are closely held and couldn’t be included in an index. However, there are other companies with multiple classes where more than one class is listed and traded. Berkshire Hathaway is one of the better known cases; the class A shares traded recently (December 6th 2013) at about $174,320.00 per share while the class B shares were trading at about $116 per share the same day. The A shares carry one vote, the B shares one-ten-thousandth of a vote; the price ratio is 1500 times.
In the S&P 500 each company is represented by only one share class. Some other indices include multiple share classes of the same company meaning that an investor’s economic exposure to the company can be larger than it appears. Multiple share classes are often used to permit the founders or the insiders to retain voting control while owning less than 50% of the outstanding stock. In other cases, the lower price class also makes the stock more readily available to investors. Typically one class of a multiple share class name is more liquid than the others and represents a substantial majority of the trading. With Berkshire Hathaway it should be no surprise that most of the trading is in the B class and that the S&P 500 includes the B class. However, Berkshire’s A class represent slightly more than half the value of the company. So that the S&P 500 reflects the total float adjusted market value of the entire company, the share count of the B class is adjusted to reflect the combined float of both share classes. This gives a proper picture of the company’s value while maintaining the liquidity of the index.
There is no adjustment for differing voting rights among multiple share classes of a single company. Such an adjustment is often not even feasible because one class of stock has no voting rights at all or the ratio of the prices of the two classes differs from the ratio of the votes. In some cases the price differential maybe quite small. Comcast CMCSA, with one vote, recently traded at about $49.24 while CMCSK with zero votes was $47.61. (Prices on December 6th 2013). The extent to which a group of investors could use their votes to force a change in a company’s management or strategy depends on more than just the number of votes per share. In many companies with a single share class and one vote per share, the management may own more than 50% and be seen as insulated from independent shareholder pressure. In other cases, where there are multiple classes and one class is “super voting” the company may still prove vulnerable to a take-over. One example is Dow Jones, acquired by News Corporation a few years ago.
Challenges for index maintenance include choosing the more liquid share and how to handle any shift from one class to another. Usually the class with the larger number of shares in the public float and with the lower price, if there is a substantial spread, will be more liquid. As mentioned, the choice was easy with Berkshire Hathaway. (Berkshire did not join the S&P 500 until the float in the class B was large enough; adding the class A to the index would have presented problems for indexers.) In some cases, classes have been switched. One example is Comcast where an acquisition for stock resulted in a large increase in CMCSA and it replaced CMCSK in the S&P 500.
Google currently has two classes of stock; class A is in the S&P 500 and carries one vote while class B has ten votes and is closely held. Google is expected to split both classes by distributing shares in a new class C which will have zero votes per share. Because each A share and each B share will receive one C share in the split, the new class will be the largest when the split occurs. Moreover, Google expects any future share issuance for employee compensation, acquisitions or other reasons will be class C shares; the Cs will always be the largest class. The question for the S&P 500 Index Committee is which class will be in the S&P 500 over the long term and, if need be, how to manage the switch from class A to class C. These issues are under review, stay tuned for an announcement.
About David Blitzer
David M. Blitzer is managing director and chairman of the Index Committee with overall responsibility for index security selection, as well as index analysis and management.