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Dual Classes up 50% During Last Three Years
In the three years since Dealogic started keeping track of the number of IPOs listing with two or more classes of stock, the number of incidents has increased by 50%. In 2009, approximately one IPO out of every 12 had a multiple share structure. Today, it's one out of eight. Clearly, institutional investors like CalPERS have more to lose from heavy-handed corporate governance than retail investors do, but nonetheless it's important for all investors to oppose anything that favors one type of investor over another. In the past, I haven't been hugely opposed to the use of dual classes because a strong and focused management team often comes from significant ownership.
Stats like those from Dealogic point out that more firms are doing this because investors don't seem to care about this subject, preferring to concentrate on how much they can make on the first day of the IPO.
Think of it another way: what if you and seven friends went on a cruise and each paid the same amount. However, one of your friends got the privilege to dictate the shore excursions all of you would undertake while on the cruise. Understandably, you'd be more than a little annoyed and most likely would balk at the suggestion. So why do investors turn a blind eye to what is clearly an exercise of undue influence?
SEE: The Two Sides Of Dual-Class Shares
According to Dealogic, 12 companies have utilized a dual class structure when going public in the first eight months of 2012, including Facebook (Nasdaq:FB) and Manchester United (NYSE:MANU). In early July, I recommended that investors stay away from the football club's IPO because they tend to do poorly for the first 18 months as a public company. Nowhere in my assessment of the IPO did I seriously consider the dual class structure. However, had I done so, I'd have heaped even more condemnation on the IPO.
The Glazer family, which controls Manchester United through Red Football LLC and owns 100% of the Class B shares, carries 10 votes as opposed to one vote for each of the Class A shares. The Glazers' sold 8.3 million Class A shares in the offering for $110 million in proceeds before expenses. Through the Class B shares, the Glazers' possess 1.24 billion votes. The family could sell all of its remaining Class A shares and have Man U issue 1.14 billion shares (at current prices, about $14.8 billion) to the public in secondary offerings and they'd still control the football club. Considering the Glazers put almost none of their own cash into buying Manchester United; they are the poster child for investors against dual class structures.
SEE: IPO Basics: Introduction
The Bottom Line
CalPERS understands that dual class structures do absolutely nothing for its members. Even if the pension fund was able to accumulate 10% or more of Manchester United, there's little it can do to influence the Glazers. George Soros must really like soccer because he apparently owns 7.85% of the team, and unless he's the mystery lender behind the Glazers' $400 million payment-in-kind repayment in November 2010, he'll have no better luck than CalPERS.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.