Under Armour Inc. (NYSE: UA) just sent shareholders two messages. The first is that it is masquerading a stock split, and the second is that shareholders now have to trust management, the way Google Inc. (NASDAQ: GOOGL) investors have to trust their management. This is a page right out of the Google playbook.
Under Armour expects to issue Class C stock through a stock dividend to all existing holders of Under Armour’s Class A and Class B common stock. While this has the same effect as a two-for-one stock split, investors need to pay attention here.
Each holder of a share of Class A or Class B stock will receive one share of the new Class C stock. Except for voting rights, the Class C stock will have the same rights as the existing Class A stock.
The company has applied with the New York Stock Exchange to list the new Class C stock. What will make matters even more complicated is that the C shares will trade under a different ticker symbol (which has not yet been determined) than Under Armour’s existing Class A stock.
Under Armour said in its release that Kevin Plank, Under Armour’s chairman and chief executive, as well as controlling stockholder, has agreed to support the proposed changes to the charter. OK, now here is what shareholders need to question: “agreed to support the changes to the charter.”
Plank wrote a letter to explain this decision. Quite simply, it effectively removes the votes tied to the shareholders. The Google founders did this after massive upside had been seen, and now Plank is making the same move. The official take is that this allows for long-term strategic moves without having to worry about short-term pressure.
The reality is that Plank already had control with the voting rights because of under Armour’s dual class. Plank said:
Our current dual-class voting structure is set to end when I own less than 15% of our total Class A and Class B shares outstanding. Dilution from regular employee equity-based compensation and other possible dilution, such as stock-based acquisitions or equity financings, as well as any sales of stock by me, bring us closer to this 15% sunset provision and could ultimately undermine our current governance structure.
This new C class is non-voting. This means that any would-be activist ambition here will get just that much less possible, and management will have to answer even less than they would have had to already.
The reality is that Plank has done very well for Under Armour shareholders. Still, this is a power grab without having to pay for it. It allows Plank to effectively move shareholders to a no-vote status when it was possible that they might have gotten votes ahead. Some investors will be fine with this structure, but new investors have to consider a whole new set of risks.
What if Under Armour decides to start spending billions on driverless cars, biotech, alternative energy, projects for outer space, and on and on? That is what Google does, and shareholders now have no check-and-balance system at all. Again, Plank has done extremely well for his shareholders. That isn’t up for debate. What is up for debate now is how he will run the company ahead, and the notion that this is taking place for close to no cost.
With shares near $81.19, Under Armour has a consensus price target of $85.81 and a 52-week trading range of $56.79 to $88.15.