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Technology

Snap is falling again as markets worry about Evan Spiegel's power to steamroll shareholders

Snap‘s stock is boxed into a corner, and CEO Evan Spiegel’s quest to hoard control of his company may be a factor.

Shares fell more than 2.5 percent on Tuesday morning after the S&P 500 made an unexpected change that will prevent Snap from joining the index. The conflict centers on the co-founders’ decision to make “all stockholder decisions.”

S&P Dow Jones Indices said it will bar stocks that issue multiple classes of shares, effectively excluding Snap, which offers no voting rights to common shares. The move prevents Snap from being included in most major S&P indices. The new policy, however, does not apply to existing components of the S&P 500, including some of the world’s most valuable public companies like, Facebook, Alphabet and Berkshire Hathaway.

“Companies with multiple share class structures tend to have corporate governance structures that treat different shareholder classes unequally with respect to voting rights and other governance issues,” the index provider said in a statement.

By foregoing an S&P 500 listing, Snap could miss out on a growing pool of wealth, as more investors opt for index funds over active fund managers. It also means that Snap will be excluded from one of the most popular benchmarks that the financial community uses to compare its returns to the market.

“It has always been a poor idea for tech companies to maintain control this way,” said Duncan Davidson of Bullpen Capital. “The value of being in the index is much higher today than previously because so much capital is passively invested in ETFs that follow indexes. A stock like SNAP should be in the index due to its market cap,” he said.

Despite the bad timing, Snap — parent of disappearing-photo app Snapchat — has acknowledged the risks of its unusual share setup. In its prospectus, Snap warned: “We are not aware of any other company that has completed an initial public offering of non-voting stock on a U.S. stock exchange. We therefore cannot predict the impact our capital structure and the concentrated control by our founders may have on our stock price or our business.”

But its founders’ white-knuckled grip on voting rights is far from Snap’s only challenge at the moment.

The company’s lockup period is coming to an end, with potential to flood the market with up to 400 million shares owned by early insiders and employees. Snap’s first-quarter financial results showed fewer users and less revenue than analysts expected, amid a steep net loss.

A tumbling share price — it’s fallen nearly 40 percent over the past 3 months — has left the stock at all-time lows this week. And analysts, even from banks that underwrote the IPO, have questioned Snap’s competitive edge against Facebook (which, by the way, also has a unique share structure).

That leaves little to keep shares steady, at least until the company reports earnings this month. Wall Street will watch whether Snap’s “well-telegraphed” user growth is slowing, or actually flattening out, said Jason Helfstein of Oppenheimer internet equity research.

“The question is, ‘Have consensus expectations come down enough?” Helfstein said on “Squawk Alley” on Monday. “We think they could beat. Maybe not by a lot, but they can actually come ahead of the headline beat.”

— CNBC’s Thomas Franck and Reuters contributed to this report.

Source: Tech CNBC
Snap is falling again as markets worry about Evan Spiegel's power to steamroll shareholders

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