From Yahoo Finance.
A Google to become Alphabet
Investors have been after Google (GOOGL) CEO Larry Page for years to cut back on the pie-in-the-sky bets that many see as a costly distraction to the company's highly profitable core search and Internet advertising businesses.
On Monday, Page and partner in crime/Google co-founder Sergey Brin came up with an unprecedented solution: create a new holding company structure to separate, at least in their financial results, Google's core Internet businesses from the farther afield fare like DNA research, smart thermostats and self-driving cars. The move harkened back to Page and Brin's controversial auction-based initial public offering back in 2004, an unusual structure that puzzled Wall Street.
The initial stock market reaction was positive, as Google shares jumped more than 7%.
Under the unorthodox plan unveiled by Page on Monday, a new holding company called Alphabet will be formed as the publicly-traded entity owning Google and all of its varied other efforts. Page will become CEO of Alphabet and Sundar Pichai, who oversaw most of Google's core businesses, will become CEO of the newly segregated Google unit. Brin will become the president of Alphabet, and Eric Schmidt will become the executive chairman of Alphabet.
The Google unit, which will report distinct financial results, will include only search, ads, maps, apps, YouTube and Android and the related technical infrastructure, the company said in a filing with the Securities and Exchange Commission. Businesses such as Calico, smart hardware maker Nest, and Fiber, as well as its investing arms, such as Google Ventures and Google Capital, and incubator projects, such as Google X, will be "managed separately from the Google business," the company said.
The solution differs from the typical strategies Wall Street bankers and activist investors favor, such as spinning off unrelated units or issuing tracking stocks. But it should give investors a clearer picture of how well Google's core businesses are doing by reporting the expensive experiments separately. Under Delaware law, shareholders won't get a chance to vote on the structural change, Google said.
And Page and Brin showed no interest in curbing their wide-ranging ambitions.
"We’ve long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes," Page wrote in a blog post announcing the change. "But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant."
In an interview with Yahoo Finance in May, Pichai emphasized that Google's mobile efforts were just getting started. “We think we have a long ways to go," Pichai said. "There are seven billion people in the world. And I think phones are the first time most people will have access to a modern computing device. With Android we want to enable that for people."
Google's shares had been flailing over the past few years, barely moving as the stock market raced ahead. But over the past few weeks, the stock has gone on a tear, up 20% since early July. That's largely because investors have grown hopeful that the company might start exercising greater discipline over spending on the far flung projects after it named former Morgan Stanley CFO Ruth Porat as its CFO.
Shares of Google will automatically be converted into the same number and type of shares in Alphabet stock. The company will continue trading on the Nasdaq Stock Market under its current symbols, GOOGL and GOOG.
In some ways, the holding company model appears similar to the way Warren Buffett has organized his huge conglomerate, Berkshire Hathaway (BRK-A). Page and Brin have taken some inspiration from Buffett over the years. But analysts said they say important differences between the two companies, especially since all of Buffett's units are profitable and much of Alphabet will not be.
"The whole point of Google's restructuring is that the core Google business is, but the rest really isn't," says Jan Dawson, chief analyst at Jackdaw Research. "That's a very different model, and means that although Alphabet might give the CEOs of the various subsidiaries lots of operating independence, they can't be anywhere near financially independent."
B What did Google just do?
So much for a slow news summer. On Monday, Google (GOOGL) surprised the market with a huge corporate restructuring announcement. But what exactly did the giant tech company do and why should investors care? Here are a few answers:
1. Google is changing its name to Alphabet? For real?
Not exactly. Google is forming a new holding company which will own all of the company's current businesses and initiatives. The holding company will be called Alphabet, but Google says it isn't planning to use that name for any consumer-facing products or services. All of Google's well-known services, like its search engine, YouTube video site, Android phone software, Maps and Gmail will remain part of Google. Google just becomes one unit in the new Alphabet company.
2. So what's the point?
Well, besides the classic Google businesses, the company also owns a hodgepodge of less famous, less developed and (much) less profitable units. It paid $3.2 billion for smart thermostat maker Nest last year. Two years ago, it started a brand new medical unit called Calico to take on the oh-so-modest challenge of extending human longevity by using data and biotechnology to maybe cure cancer. And, of course, it has myriad other experimental efforts, like self-driving cars, Internet balloons and fiber-optic broadband service.
Until now, all those expensive initiatives, which produce little or no revenue, were lumped in with Google's overall results. That muddied the analysis of how well Google's developed businesses were performing. But with the restructuring, the company is going to tell Wall Street for the first time just how profitable its core Google business is apart from all the money-losing startups.
3. Sounds like just rearranging the same old parts of Google into a slightly different legal structure. So what's really the point?
Well, yes -- co-founders Larry Page and Sergey Brin are still devoted to all of their big bets on the future. And despite the creation of Alphabet, they say that they're not slowing down or cutting back. But Wall Street has been increasingly annoyed by the huge amount of money siphoned off on these "non-core" businesses. Alphabet looks like an attempt to answer the critics by revealing more information about the performance of the parts of Google that Wall Street and investors actually care about.
The move will also allow Google to give some of its top executives weightier-sounding titles. Page, currently the CEO of Google, and Brin, who runs the Google X lab effort, will move up to run Alphabet. So Sundar Pichai, who already oversaw most of the company's well-known businesses as a senior vice president, gets bumped up to CEO of Google.
4. So it's for the benefit of shareholders? When do shareholders get to vote on the restructuring?
They don't. Google says that under Delaware law, it can pull off the Alphabet changes without needing a shareholder vote. Once the deal is done, which will be toward the end of the year, all publicly traded shares of Google, both the original shares that trade under the ticker "GOOG" and the newer Class C shares that trade as "GOOGL," will simply become shares in Alphabet instead of Google. But since Alphabet owns the exact same assets that Google owned, there's no real difference, at least as far as Delaware law is concerned (Delaware is where the company is organized). Google says it plans to complete the transition in time to report its fourth quarter results under the new Alphabet organization. That report will come in the third or fourth week of January 2016.
C Why Google had to create Alphabet
No one believes in defying convention more than Larry Page. When Google (GOOGL) went public in 2004, Page and his running mate, Google co-founder Sergey Brin, snubbed Wall Street and instead of doing a typical IPO, which enriches investment bankers, opted for a Dutch auction. Huh? A what? It’s the same sort of head scratching many of us are doing today, as Google does something no company has ever done before — a restructuring by grabbing itself by the lapels and turning itself inside out to create a conglomerate.
In case you missed it Monday, Google is creating a holding company called Alphabet that will own Google—including search, Maps, Chrome, Android, Apps and YouTube—while the other so-called moonshot businesses such as DNA research, self-driving cars and broadband bets will be placed outside of the old Google, but under the Alphabet umbrella. Google shares will be converted to Alphabet shares. That’s for now. I say that because I think it’s very likely that Page & Co. will continue to shape and reshape Google and Alphabet as they see fit over the coming years.
Page—and yes, he is the driver here, not Brin nor Google Chairman Eric Schmidt nor the new CEO, respected company insider Sundar Pichai—is obsessed with not hewing to conventional wisdom or becoming complacent. That kind of thinking seems to serve him well. For instance, yes, Page and Brin took their company public 11 years ago, but they also wanted to maintain control so they issued two classes of stock with the two of them holding a majority of the super-voting stock. True family media companies (like the New York Times and Washington Post) have been doing this for years, but too often that strategy has ended up as nothing more than a means to keep ineffectual heirs flush with dividends. The Google guys wanted to stay in control because they really wanted to run their company differently. And they have, letting employees use 20% of their time to work on non-core projects, to brainstorm, tinker and dream. What’s the ROI on that? Hard to say, but I can tell you that it has helped create a culture that continues to attract the best and brightest engineering talent, and talent writ large, on the planet.
Related: What did Google just do? 4 things to know about the company's restructuring.
And yet Page also listened. He heard complaints that his company lacked financial discipline and hired a high-profile CFO, Ruth Porat from Morgan Stanley. And he heard that shareholders were being forced to indulge his passion for innovation, which might be eating into the stock’s performance. While under the new structure, Alphabet investors (i.e. old Google investors) will still own the big bet -- read: unprofitable businesses -- but they will be stripped out of Google’s core businesses for reporting purposes which will now allow us to see just how incredibly profitable Google is.
Page’s restless iconoclasm is incredibly important because the rate of change in the technology business is only getting faster and faster. Companies that once appeared to have massive competitive advantages like Wang Laboratories, BlackBerry (BBRY), and even IBM (IBM) have seen their businesses stealthily overtaken by smaller and nimbler companies. (Did you know that HTC was the No. 1 smartphone maker in the U.S. in 2011?) Companies appear dominant, until they aren't.
And that’s why Page has been pushing Google so hard. For all of Google’s dominance in its core business of search, for instance—replete with EU investigations of anti-competitiveness—search has vulnerabilities (disclosure alert: our parent company Yahoo competes with Google in search and email). Besides traditional competitors like Bing and newer players like Quora, Facebook (FB) is a huge challenge to search as its massive universe lies outside of Google’s purview. And on smartphones, consumers use apps, which are also not subject to Google’s search engine, much more than the mobile web. Page knows that Chrome, Android, Maps, YouTube -- any one of Google’s bread and butter businesses -- could be toast within five years.
The web provides endless opportunity to grow and disrupt, which is what companies like Amazon (AMZN), Facebook and, of course, Google have done—that’s the upside. And yet that same limitless freedom contains a frightening downside as well. A tyranny of infinity, if you will. With costs and barriers to entry on the web so low, there's little place to hide. Scale, as in potential customers, is so vast and so quickly achieved that a company must continue to keep growing at an almost unimaginable rate. Facebook now has 1.4 billion users and Amazon sells everything under the sun, but the world -- and Wall Street in particular -- is constantly asking, what have they done lately? Which is why Facebook, Amazon and Google keep galloping ahead. Because a sustainable business just isn’t anymore. A company must continue to execute and grow at Internet speed, or it will be supplanted.
