Thursday, June 29th, 2017

Why Facebook is Planning a Stock Split

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Sean O'Reilly: When do you think investorsshould care about a stock split? When will it affect their lives? Dylan Lewis: To go back to that metaphor,the pie is the same size, and you're just slicing it differently, and you're owningthat same portion.

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.

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