What is worth more…10 dimes or a dollar? To split or not to split… Google vs Baidu

By: ispeculatornew
Date posted: 06.03.2010 (3:19 am) | Write a Comment  (4 Comments)

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At this point, I don’t think many investors would consider Baidu (BIDU) and Google (GOOG) as similar companies. Sure, they both operate in the search business but the comparison stop there. Google was either kicked out or pulled off from China (depending on how you look at it) while Baidu (BIDU) mainly operates from the emerging world power. They both dominate their markets although Google’s market is obviously much bigger. One other main difference is that Baidu (BIDU) seems to believe in the benefits of something that Google (GOOG) clearly does not; stock splits.

A look back at Google

When Google did its initial IPO, on August 19th 2004, it was non-conventional in many ways. First off, it was not a traditional IPO in that every investor, small or big, had the opportunity to buy stocks since it was done through a dutch auction. The market set the price at 85$ which brought up many questions, especially since the stock opened up over 100$ and never traded under the 100$ barrier. Traditionally, when companies do an IPO, they choose to do so at prices around 20$ or so. There are exceptions of course but that is the general range that is used. So seeing Google go for such a high price was a bit surprising.
Just to clarify, the easy way to do a lower priced IPO would be to split all exisitng shares into 10 lower priced shares for example. That would have made the shares 10 x cheaper. But Google decided it was not going to do that, they would IPO at the price

Split vs no split

It is a million dollar question of course isn’t it? Would investors prefer buying Google’s stock at 500$ (where it currently is) or buying a stock 10x more diluted for 50$. There are many different philisophies surrounding stock splits. The most “anti-split” person might be Warren Buffet. His stock has gone from a few hundred dollars to now being worth over 100,000$. Almost all companies would have split the shares at this point but Buffet, a practical man, believes that it would make no different. Why exchange 10 dimes for a dollar? It does come out to the same thing right?

Psychological

But there is a counter to that argument. You can see in any store that consumers generally buy more of a lower priced items even if it comes down to the same thing. The same logic would probably apply to stocks. It is a debate with no end though. Think of an investor that wants to buy 2000$ worth of Google. Does he prefer buying 4 shares at the current price or perhaps 100 at a lower price. It might be psychological only but many investors would prefer the 100 shares at a lower price. Logical or not, more buyers can bring higher stock prices which is obviously good for Google. You could find hundreds of companies that believe in doing a split and others that don’t, there is no clear answer…

Practical

We can discuss it all we want but in the end it seems like a philosophy and Google has decided to avoid stock splits while Baidu went ahead and did one on May 12th. They went ahead and did a 10 for 1 stock split moving from a 700$+ stock price to just over 70$.

Did it pay off?

The end result is that it paid off big time. The day after the split, while the Nasdaq moved up slightly (1.8%), Baidu moved up 9.5% with no other significant news contributing to the jump!!! For a company with a market cap of $25 billion, even a gain of 5-7% is huge. Did Baidu just create value through its split? Of course, there is no official reason as many other explanations could be used… but it certainly looks to me like this split was a very good move by Baidu… Do you guys agree?

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4 Comments

  1. Comment by Craig — June 3, 2010 @ 7:27 am

    I’d say that when you have a stock like Google, you don’t want to split because people are willing to invest more money in such amazing company.

    on the other side, does the weight of small invesotrs is that important? Because it’s not like the institutional traders care if the stocks is $50 or $500. They will trade for more than 1M$ on the stock anyway 😉

  2. Comment by Zavi — June 3, 2010 @ 8:44 am

    Stock splits do not create any intrinsic value change, but yeah the benefits are “purely” psychological!! My answer: Stock split, I don’t see any drawback to what Baidu did…

    I think that if Google did a stock split and reduced the cost per share, the stock would just go back again because demand can rise and the stock price would increase even more… seems that Google is not in a hurry!!

    @ Craig, As for me, a small investor like me, I care, I prefer to buy 100 shares of GOOG than “only” 10 shares of GOOG hehehe

  3. Comment by The Financial Blogger — June 3, 2010 @ 1:02 pm

    I’m with Zavi, I would like to buy GOOG as a small investor but $500/share is way to much for me (unless I buy 6 shares 😉 ).

    GOOG should think about their users and split ;-D
    Who knows, some people are stupid enough to think it’s a good deal at $50 (even if they just split by 10).

  4. Comment by IS — June 4, 2010 @ 3:58 am

    @Craig – That is the whole question. I agree 100% that institutional investors do not care much but I would say there are still a fair amount of smaller investors and I’m not certain that having even a small amount of them not invest is a good idea.

    @Zavi @ TFB:) Yes, I’m with you I think, I would rather Google split although I do tend to think it’s not a huge issue either.

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