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Classy insiders: Voting power vs economic interest of top media shareholders

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Classy insiders: Voting power vs economic interest of top media shareholders

Opinions expressed in this piece are solely those of the author and do not represent the views of SNL Kagan.

Class warfare has been around for decades in the stock structures of media companies worried about hostile takeovers.

It has also been embraced by media tech managements looking to disperse risk while maintaining control among founders and early investors. For instance, social messaging company Snap Inc., which operates Snapchat, is said to be readying a March IPO with a multi-class structure that would restrict voting rights of non-insiders shareholders.

Snap could be the largest overall IPO since Chinese e-commerce giant Alibaba Group Holding Ltd. went public in September 2014 with $21.8 billion of new equity. With an anticipated valuation of $20 billion-plus, Snap would be the largest U.S. media tech IPO since Facebook Inc.'s $16 billion debut in 2012.

We do not yet know the details of the offering, but according to a recent report in The Wall Street Journal, Snap founders Evan Spiegel and Bobby Murphy would attempt to retain more than 70% of the voting power with only about 40% of the company’s equity while pre-IPO and new investors would own restrictive voting shares. If so, Snap would be following a trend embraced by other media tech IPOs, including Alphabet Inc., Facebook, LinkedIn Corp., Zynga Inc., and Groupon Inc. when they came to market.

SNL Image

In my summary of select media and media tech companies with multi-class share structures, I rank the companies by a "control ratio" of voting interest divided by economic interest, a metric I created to compare the disparities of investor class. The average voting control is 49.3% while the average economic interest is only 10.7%, which creates an average control ratio of 4.6x. My averages do not include Twitter Inc., shown at the bottom of the table. Twitter does not have a restrictive voting stock structure, but it is a rival of Snap, so I suspect investors will be using Twitter and Facebook as key comps when they consider Snap's IPO terms and pricing.

Voting class structures widely vary. Some like Comcast Corp. include "super stock" for founders with 15 votes per share while others like Viacom Inc. are structured with mostly non-voting shares held by public investors. Some include special voting advantages to insiders, which allows them to effectively control the board of directors.

In general, higher vote shares are illiquid and rarely change hands. For those that do trade, the control shares tend to fetch a premium. For example, on Jan. 30, Viacom class A voting shares closed at a 7.2% premium to non-voting class B shares, while Discovery Communications Inc. class B stock with 10 votes per share was priced 4.4% higher than the class A stock with one vote per share and 6.6% higher than the non-voting class C stock.

For multi-class stocks in general, premiums averaged 3% from 1990 through 2015 for high-vote versus low-vote shares on all U.S. acquisitions or unifications of class stocks, according to a 2016 study by American Society of Appraisers. The report also noted that 15% of U.S. IPOs in 2015 had multi-class structures, up from 12% in 2014 and 1% in 2005.

There could be push back on Snap's multi-class structure by institutional investors. In March 2016, T. Rowe Price announced it would oppose key directors at companies with multi-class voting structures; and in December 2016, Institutional Shareholder Services said it would recommend opposing director nominations of companies with structures that create unequal voting rights.

Shareholder voting rights activists would be fighting a strong investor appetite for growth, regardless of the corporate structure. Snap has 60 million North American users — reportedly more than Twitter and Pinterest — it skews young, and it is gaining support among advertisers looking to break through Google's and Facebook's domination of distribution.

You can tell Snap has been gaining steam with its knack for storytelling and immediacy because Facebook and Twitter are working on features that mimic Snapchat. Beyond that, Snapchat is attracting high-profile users like Michelle Obama, who signed on in June 2016; and President Donald Trump, who reportedly became a member in January.