Google Proposes Changing Stock Structure to Maintain Its Control
Google Inc., the world's largest Internet-search company, plans a new stock structure that gives the company more leeway in issuing shares, while letting management keep control over the direction of the business.
The stock change would create a new class of nonvoting shares that will be distributed to existing shareholders in what is effective a 2-for-1 stock split.Google announced the move as part of Google's first-quarter financial results, which met or beat most analysts' estimates, boosted by online-ad spending.
Google aims to prevent employee stock compensation and stock-based acquisitions from diluting the voting power of its founders. The Mountain View, California-based company wants the flexibility to be able to make long-term investments, using its shares, without the risk of losing control.
"Day-to-day dilution from routine equity-based employee compensation and other possible dilution, such as stock-based acquisitions, will likely undermine this dual-class structure and our aspirations for Google over the very long term," Chief Executive Officer Larry Page and co-founder Sergey Brin said today in a statement posted online. "We have put our hearts into Google and hope to do so for many more years to come. So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world."
First-quarter profit, excluding certain costs, was $10.08 a share, the company said on its website. Analysts had projected $9.64 on average, according to data compiled by Bloomberg. Excluding revenue passed on to partner sites, sales rose to $8.14 billion, matching estimates.
Page, who became CEO a year ago, has pushed Google deeper into display advertising and mobile services. This year the company will account for 16.5 percent of the U.S. market for display ads, which include banners and videos, according to EMarketer Inc. By next year, Google is projected to grab almost 20 percent, unseating Facebook Inc. as the market leader.
"The viability of Google is still very, very strong," said Ron Josey, an analyst at ThinkEquity LLC in New York. He recommends buying the stock, which he doesn't own himself. "There's still a lot of room for growth across its multiple businesses."
Google's shares were little changed in late trading after the announcement. They had risen 2.4 percent to $651.01 at the close in New York.
While the stock proposal will be subject to a vote at Google's annual meeting on June 21, Page, Brin and Chairman Eric Schmidt control the majority of voting power.
"We expect it to pass," David Drummond, Google's chief legal officer, said in the statement.
Google still gets most of its revenue from Internet search ads -- the text links that appear in query results. The average cost per click declined 12 percent in the first quarter after falling 8 percent in the fourth quarter. The number of paid clicks rose about 39 percent.
"The cost per click is worse than expected, but that looks like it was made up for by very strong paid click," said Clay Moran, an analyst at Benchmark Co. in Delray Beach, Florida. He has a hold rating on the stock, which he doesn't own. "There was good growth in revenue."
The company posted first-quarter net income of $2.89 billion, or $8.75 a share, compared with $1.8 billion, or $5.51 a share, a year earlier.
Mobile search ads have become a bigger piece of Google's business. Companies will probably commit 23 percent of their search-based ad spending to mobile devices by the end of this year, according to Marin Software, which helps manage about $3.5 billion annually in online ads. That's up from 8.7 percent at the end of last year.
Roche's First-Quarter Sales Drop on European Pricing, Franc
Roche Holding AG, the world's biggest maker of cancer drugs, said first-quarter sales declined 1 percent, hurt by pricing pressure in Europe and the strength of the Swiss franc.
Sales dropped to 11 billion francs ($12 billion) from 11.1 billion francs a year earlier, the Basel, Switzerland-based company said in a statement today. Analysts predicted 11.1 billion francs, the average of eight estimates compiled by Bloomberg. Roche, which doesn't release quarterly earnings, reiterated its forecast for the year.
Roche indicated it's willing to raise its $6.7 billion hostile takeover offer for Illumina Inc. The bid is a "more than reasonable starting point for negotiations," Roche said in a letter to Illumina shareholders late yesterday. In a separate statement today, Roche said publicly available information doesn't justify a higher price.
Roche will consider "all options" for Illumina and negotiations remain "the preferred way," Chief Executive Officer Severin Schwan said on a conference call with reporters today. Roche spoke with several of Illumina's main shareholders before raising its bid, Schwan said.
Pharmaceutical revenue dropped 1 percent to 8.6 billion francs. Sales of the Rituxan cancer medicine, Roche's biggest- selling product, rose 7 percent at constant exchange rates to 1.61 billion francs, while the cancer drug Avastin climbed 1 percent to 1.39 billion francs. Diagnostics revenue was unchanged at 2.4 billion francs.
"Overall, these are a very solid set of 1Q 2012 sales numbers," Jeffrey Holford, an analyst with Jefferies & Co., wrote in a note to investors today. He recommends buying the stock.
The strength of the Swiss currency cut 3 percentage points off Roche's sales growth. Drug sales in western Europe, where governments have been trying to rein in health spending, fell 4 percent on continued pricing pressure.
Roche shares rose 1.6 percent to 156.70 Swiss francs in Zurich. The stock had returned 22 percent including reinvested dividends in the past year, compared with a 20 percent return for the Bloomberg Europe Pharmaceutical Index.
Roche reiterated that it expects percentage sales growth this year in the low- to mid-single-digit range at constant exchange rates for the company and the pharmaceutical division. Drug sales should accelerate, driven by new products and expanded sales of existing products, the company said. Rochealso expects diagnostic sales to outpace the market. Core earnings per share should increase by a high single-digit percentage, it said.
Illumina has rejected Roche's offer as inadequate and refused to negotiate. Roche raised the bid to $51 a share on March 29 from $44.50 a share on Jan. 25. It also proposed that Illumina shareholders oust four directors at the April 18 annual meeting, expand the board and elect six Roche nominees, giving the Swiss company a majority.
The Swiss drugmaker said last week it is willing to study "additional value" in its proposal after a proxy-advisory firm recommended the target company's shareholders reject the offer.
"There is no reason for us, whatsoever, to increase our offer unless we get into negotiations," Schwan said on a conference call with analysts today.
Investors in the genome-sequencing company "should have the right to choose between Roche's $51 all-cash offer, plus any increase to that offer that negotiations between Roche and Illumina may produce, and an uncertain future amid increasing headwinds for Illumina and the broader sequencing sector," Schwan wrote in the letter yesterday.
"That kind of says you could get $51 and then some," Les Funtleyder, a fund manager who helps oversee $100 million at Miller Tabak & Co., including Illumina shares, said in a telephone interview. "It's at least a signal that Roche would be willing to increase its offer."
Spokesmen for Illumina declined to comment on Roche's letter.
Roche said in its letter that Illumina's future as an independent company is "far from certain," disputing a comparison Illumina cited recently between itself and Apple Inc., the world's most valuable company and the maker of the iPhone and iPad.
"Apple's revolutionary products were huge and instantaneous commercial successes, appealing to a seemingly endless consumer base around the world," Schwan said in the letter. "Illumina's products on the other hand, although 'revered by genomics researchers around the world,' serve a much smaller and highly regulated market."
Goldman Sachs to Pay $22 Million Over Analyst Huddle Claims
Goldman Sachs Group Inc. will pay $22 million to resolve U.S. regulators' claims that the firm failed to implement policies to keep its stock analysts from tipping select clients about upcoming research changes.
Goldman Sachs held weekly huddles from 2006 to 2011 in which analysts discussed short-term trading ideas and traders shared their views of the markets, the Securities and Exchange Commission said in a statement today. The meetings created "a serious risk" that employees and clients could trade on the non-public information, the SEC said.
"Higher-risk trading and business strategies require higher-order controls," SEC Enforcement Director Robert Khuzami said in the agency's statement. "Despite being on notice from the SEC about the importance of such controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients."
Goldman Sachs paid a $10 million fine last year to resolve similar claims from state regulators in Massachusetts and was among 10 securities firms that paid disgorgement and civil penalties totaling $1.4 billion to settle claims related to a probe of analysts' conflicts of interest in 2003.
"We are pleased to have resolved this matter," Goldman Sachs spokesman Michael DuVally said today in an e-mail.
Under the settlement, Goldman Sachs will pay about $11 million to the SEC and the same amount to the Financial Industry Regulatory Authority, the Washington-based brokerage industry regulator.
Analyst conflicts of interest garnered attention this month after President Barack Obama signed legislation that critics said will undo some rules emanating from the 2003 settlement. Under the law, regulators are no longer able to write or maintain rules that restrict investment bankers from arranging communications between analysts and investors when dealing with firms with less than $1 billion in gross annual revenue.
In 2007, Goldman Sachs launched the Asymmetric Service Initiative, a program in which research analysts called a select group of about 180 hedge-fund and investment-management clients to share information and trading ideas from the huddles, the SEC said. The huddles and the program were an "extensive undertaking" to improve the performance of the firm's traders and boost commissions from clients, according to the agency.
Research analysts' contributions to the huddles were considered in their performance evaluations and could impact their compensation, the SEC said.
In an administrative order filed today, the SEC cited an e- mail from a Goldman Sachs manager that said employees had a responsibility to generate trading ideas for huddles "based on your view of the stocks that will move short term" and generate profits for the trading desk.
Goldman Sachs traders who participated in the huddles were primarily those who dealt directly with customers, including market-making and client-facilitation traders from its securities division, the SEC said. Until 2009, members of Goldman Sachs's Franchise Risk Management Group, who were authorized to establish large, long-term positions on behalf of the firm, also attended the huddles, according to the order.
The huddle program created a "serious and substantial risk" that analysts would share material, non-public information about their research with clients, many of whom were frequent, high-volume traders, the SEC said. Goldman Sachs failed to establish and enforce policies and procedures to prevent misuse of the information, according to the agency.
Best Buy Said to Probe Dunn's Relationship With Employee
Best Buy Co.'s board investigation of former Chief Executive Officer Brian Dunn's personal conduct centers on an inappropriate relationship with a female employee, according to a person familiar with the matter.
People close to Best Buy were concerned that Dunn's behavior was threatening the company, said the person, who asked not to be named because the matter is private. The Star Tribune in Minneapolis reported on the nature of the investigation earlier, citing a person familiar with the situation.
Best Buy announced Dunn's resignation earlier this week, saying that the change was part of a "mutual agreement" that new leadership was needed. The company later said that a board committee was probing Dunn's "personal conduct, unrelated to the company's operations or financial control."
The investigation is continuing and Best Buy has no additional comment, Ron Hutcheson, a Best Buy spokesman who works for Hill & Knowlton Strategies in Washington, said today in an e-mailed statement.
"The board's findings will be made public and appropriate action will be taken if warranted," Hutcheson said.
Dunn didn't immediately reply to a message left for him today at Richfield, Minnesota-based Best Buy's executive offices.
Best Buy rose 1.3 percent to $22.24 at the close in New York. The shares have fallen 4.8 percent this year.
The retailer said today in a statement it plans to take six months to nine months on a search of internal and external CEO candidates, including Mike Mikan, the director who was named interim CEO this week after Dunn's departure.
Director Kathy J. Higgins Victor will oversee the board's global CEO search, the company said.
Dunn's resignation has hurt employee morale and makes the company's turnaround more difficult, former Best Buy CEO Brad Anderson said.
"When that happens at the top, it shakes the whole organization," Anderson, 62, said today in a telephone interview. "To really do great work, people have to believe in what they are doing and be inspired. You've got to establish and sustain a trust with the people who are touching your customers. This is pretty devastating to that."
Best Buy probably will look outside of the organization for its new CEO after the loss of sales to Amazon.com Inc. and Apple Inc. requires Best Buy to figure out how to survive, Anderson said.
U.S. online sales reached $202 billion last year and may climb 62 percent to $327 billion in 2016, according to Forrester Research Inc. in Cambridge, Massachusetts. At that level, online commerce would account for 9 percent of total retail sales, up from 7 percent in 2011.
"You adapt to where the customer is going," Anderson said. "They've got to find a CEO with the enthusiasm for that kind of change and vision."
Anderson said he groomed Dunn to succeed him when he retired in 2009, making his departure a "sad story."
"It's incredibly painful thing for Brian and his family," Anderson said. "This is not to diminish Brian's ownership or the consequence or the other consequences to people in the organization, but just on a personal level this is really hard to see."
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