Takuya Homma's List: Dual Class Stock

• From a statistical perspective, it would be better to hold the single-class stock in the industry you are looking at, compared to the dual-class company

• why is it good for newspaper companies? why was it bad for multi businesses companies? is it good for technology companies as a whole? is it good for Google? what's good about DCS? and what's bad? what's good for what? what's bad for what? - Takuya Homma on 2008-05-07

• And if you don’t want to bow to the whims of the marketplace, then there’s a simple solution that Marc ignores: Don’t go public.

      

• Once shares are listed, however, companies cannot reduce the voting rights of the existing shares or issue a new class of superior voting shares.
  
• Ford's dual-class stock structure, for instance, allows the Ford family to control 40% of shareholder voting power with only about 4% of the total equity in the company. Berkshire Hathaway Inc., which has Warren Buffett as a majority shareholder, offers a B share with 1/30th the interest of its A-class shares, but 1/200th of the voting power. Echostar Communications demonstrates the extreme power that can be had through dual-class shares: founder and CEO Charlie Ergen has about 5% of the company's stock, but his super-voting class-A shares give him a whopping 90% of the vote.
• Not every dual-class company is destined to perform poorly--Berkshire Hathaway, for one, has consistently delivered great fundamentals and shareholder value. Controlling shareholders normally have an interest in maintaining a good reputation with investors. Insofar as family members wield voting power, they have an emotional incentive to vote in a manner that enhances performance. All the same, investors should keep in mind the effects of dual-class ownership on company fundamentals.

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• • The key leaders of the company -- typically the founders -- who will own the controlling Class B shares, are also major economic shareholders in the company. They own a significant portion of the company and are therefore highly incented to maximize the value of the company over time.
    
  • The key leaders of the company who own the controlling Class B shares have a long-term goal of building a major franchise, and the commitment required to execute against that goal.
    
  • The controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.
    
  • All public shareholders understand what they are getting into up front -- no bait and switch.
• n practice, the world at large, the markets in which companies operate, and Wall Street in particular, throw up all kinds of short- and medium-term noise in the face of every public company, all the time.
• The huge advantage of a dual-class stock structure is that it lets the company's core management simply ignore most of this stuff and stay focused on the long-term goal.
• think Google has changed the rules on this topic -- I think many technology companies, certainly the ones with high potential, that go public over the next decade will have dual-class stock structures, due in part to the Google precedent.

• What's your recommendation to technology companies that are going public?

    

  Strongly consider implementing a dual-class stock structure, but only under the following conditions:

    
    
  • The founders are committed to run the company for the long term and want to build a real franchise.
    
  • The founders are also major economic owners of the company.
    
  • The founders have an absolute commitment to treat all other shareholders fairly, and to consider themselves entirely in the same boat economically.
    
  • All public shareholders starting with the IPO know exactly what they are getting into -- no bait and switch.
    
    

  Under these conditions, a dual-class stock structure is not only an outstanding idea -- I think, for our industry, it may be the future

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