How Google's Transformation to Alphabet Will Impact Shareholders

Google Inc. (GOOG, GOOGL) has been straying from its core search and advertising business for some time now, dabbling in everything from street-level maps of the entire globe to self-driving cars to stratospheric internet balloons. Not to mention Calico, a side project with the goal of defying death itself.

CEO Larry Page acknowledged as much as much in a company blog post Monday, and announced that, in order to make Google “cleaner and more accountable,” the company would undergo a massive restructuring. Google will be “a bit slimmed down” and become a wholly-owned subsidiary of a new company – or “collection of companies” – Alphabet Inc. that will act as a parent for the tech giant’s many ventures.
Google will retain search, ads, maps, apps, YouTube and Android, according to the company’s SEC filing, while Calico, Nest (interconnected thermostats and smoke detectors), Fiber (broadband and cable), Google Ventures (early-stage venture capital), Google Capital (late-stage venture capital) and Google X (Area 51) will be their own subsidiaries.
Sundar Pichai, currently senior vice president of products, will be Google’s new CEO. Larry Page will become CEO of Alphabet, while Google cofounder Sergey Brin will become Alphabet’s President. Eric E. Schmidt will be executive chairman. The company’s SEC filing provides more details on personnel changes.

The changes are clearly aimed at investors, who have been wary of Google for becoming increasingly amorphous, opaque and untethered to any perceivable core business. This sentiment is the backdrop for Page’s excitement about “Improving the transparency and oversight of what we’re doing.” The company will adopt segmented reporting beginning in the fourth quarter, with Google reporting one set of results and Alphabet’s other businesses reporting together.
Page could even be accused of pandering to the market: “We also like that [the name] means alpha-bet (Alpha is investment return above benchmark), which we strive for!” Still, investors have forgiven the hokiness and cheered the announcement. As of 9:41a.m. Tuesday, GOOG is up over 6% from its previous close. Mizuho Securities and Stifel Nicolaus have raised their ratings on the stock to “buy” from “neutral” and “hold,” respectively.
At the time of the restructuring, all current Google shares will convert into an equal number of shares of the same class in Alphabet, with the same rights. They will trade under the same tickers, GOOGL (Class A) and GOOG (Class C).

Good Conglomerate or Bad Conglomerate?

Exactly what direction these changes imply for Alphabet is not certain. The New York Times has likened the new corporate structure to Warren Buffett’s Berkshire Hathaway Inc. (BRK-A), an investor darling despite the usual aversion to conglomerates. Perhaps Alphabet will follow broadly the same model, acquiring businesses from a range of industries and building them in order to realize their value potential, or as Page puts it, “Empowering great entrepreneurs and companies to flourish.” The difference between Google’s current m.o. and Buffett’s boils down to transparency, making this arguably a best-case scenario for investors.
It is not the only scenario, though, and details about Alphabet’s future direction are scarce. Page ruled out one possibility, that Alphabet will become “a big consumer brand with related products” à la Apple Inc. (AAPL): “the whole point is that Alphabet companies should have independence and develop their own brands.”
Lax strategy could lead to a worst-case, bad-conglomerate scenario. Through spinoffs, IPOs, retained stakes and appeals to synergies to justify the muddle, Alphabet could take on the knotted structure of South Korea’s chaebols and turn an opportunity to please investors into market anathema. Even if little changes going forward, having every division besides Google continue to report together is not actually as transparent as most investors would prefer.

The Bottom Line

Relatively early in its life, Google became in essence a conglomerate. Its businesses have little to do with each other, and a whole genre of reporting has emerged to cover its acquisitions and semi-secret side projects: focused on the sheer eccentricity of this or that plan to change the world, the stories betray the futility of trying to assess a given venture’s impact on the company as a whole. This move is a good first step towards taking the bewilderment out of being a Google—or Alphabet—shareholder. Whether Alphabet will be a good conglomerate, in the mold of Berkshire Hathaway, or a bad one, in the mold of the tangled chaebols, remains to be seen.

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