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Do Dual-Class Stocks Make for Second Class Shareholders?


Twenty dual-class IPOs occurred in the US last year, up from only a dozen in 2010. In the S&P 500 (INDEXSP:.INX), forty companies employ this structure.

Far from Silicon Valley, the soccer fields of England also supply eloquent testimony to the current dual-stock mania. Manchester United (NYSE:MANU) went public earlier this month in the largest post-Facebook IPO. Once more, the offering allowed its owners, Florida's Glazer family, to keep control via a 10:1 super-voting share class. Dissent directed at the clan from local fútbol fans likely has more to do with the under-performing team, which kicked off its English season with a defeat on Monday, than the machinations of stock markets an ocean away. Investors, however, who quickly saw their stock drop below its IPO price of $14 will be more concerned about losing money than matches.

Currently just under 40 S&P 500 firms, accounting for approximately 8% of overall market capitalization, employ this structure. Yet with Wall Street famous for its "trend-is-your-friend" ethos, many find the increasing tendency to opt for it troubling.

Twenty dual-class IPOs occurred in the US last year, up from only a dozen in 2010. And octogenarians, not just hooded Harvard wiz kids, are among the most prolific practitioners.

At Viacom (NASDAQ:VIA), Sumner Redstone, now in his 90th year, owns only about 10% of the company, yet oversees almost 80% of its votes. Warren Buffett's Berkshire Hathaway (NYSE:BRK.B), where "B" shares confer just 1/200th of overall voting authority, and Rupert Murdoch of News Corp, each aged 81, are mere whippersnappers by comparison, but in recent years the investment community has also had reason to curse the relative lack of accountability at both of their dual-stock empires.

The fleeting front page scandal of Buffett's heir apparent may have been small potatoes compared with the phone hacking of a murdered schoolgirl that occurred under Murdoch's leadership, but the thorny issues of succession and potential corruptibility of absolute power highlighted by both are unquestionably harder to address under the current setup. News Corp's Class "A" shares account for roughly 70% of market cap, yet fail to provide the stakeholder a single vote. It's only the minority "B"s, heavily controlled by Mr. Murdoch himself, that grant this power. In October 2007, News Corp shareholders did decide against a proposal to abandon the two tier system by a hefty 77%-23% margin. This was, however, well before the News of the World tabloid debacle broke, and it should also be noted that deputy head James Murdoch would have been booted from the board last year without his father's votes. Such scenarios don't sit well with corporate purists, although both Berkshire -- a singularly brilliant performer since the 1960s -- and News Corp -- whose shares have recently traded at their highest level in almost half a decade -- can claim to have made many critics cry all the way to the bank.
No positions in stocks mentioned.
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