There's no disputing the fact that Google (GOOGL) reinvented the way the world accesses information. The company has a whole host of apps and tools that many consumers use on a daily basis, from its search engine and Gmail to Google Drive, its file storage service.

The market now knows Google's parent company as Alphabet. But many people aren't aware of how the corporation ushered in this change. Keep reading to find out the reasons why the company's management decided to make the switch from Google to Alphabet.

Key Takeaways

  • Known around the world, Google abruptly renamed itself Alphabet in 2015, making Google a subsidiary.
  • As a parent company, Alphabet allowed Google to expand into domains outside of Internet search and advertising to become a technology conglomerate.
  • The company now runs a lesser risk of antitrust violations and is also better able to account for income streams from various subsidiaries.

Google to Alphabet

Google's leadership gave Wall Street formal notice of its intentions to become Alphabet, a technology conglomerate by announcing a new parent entity that would unite its widening interests and product lines. Apart from Google's core search business, there are a number of companies (or "Other Bets") that make up Alphabet. They span a diverse array of industries, including robotics, life sciences, healthcare, and anti-aging. 

In a blog post announcing the move, former chief executive officer (CEO) Larry Page said the new entity would help the company take a long-term view and improve the “transparency and oversight” of its actions. The new entity, he wrote, was an “alpha-bet (Alpha is investment return over benchmark), which we strive for!” 

Not much changed for investors in the reorganization. According to the Securities and Exchange Commission (SEC) filing, each Google share was swapped for one Alphabet share. The change had minimal consequences on the company's bottom line and on its direction. 

That then begs the question: Why did Google change its name to Alphabet? 

The Wall Street Effect

When it debuted on the stock market, Google became Wall Street's darling. Its market capitalization increased by $27.2 billion, giving it a market cap bigger than that of Ford (F) and General Motors (GM) on its very first day of trading. That number was based on the market's assessment of the company's search business and turned out to be largely correct as Google's prowess in search powered its fortunes over the years.

The arrival of the social media brigade, however, blindsided Google. Even as the company was coping with Facebook's (FB) onslaught on its core business, the disintermediation of web search into mobile apps further eroded Google's bottom line. Google's foray into social media was pretty much a disaster.

Perhaps the thinking was that Google could pioneer other industries, just as it started the search industry.

But the absence of numbers related to the cost and operational expenses of Google's new or acquired ventures made Wall Street nervous. The company's chairman defended the moon shots to investors at the shareholder meeting in 2015.

The move was intended to help allay the market's fears by streamlining operations and providing investor visibility into the operations of Alphabet's new ventures and acquisitions. It helped Alphabet prove to investors that it can deliver profits even as it explores new markets and avenues for future profits.

The company's stock price jumped in record numbers after chief financial officer (CFO) Ruth Porat spoke about transparency in the company's 2018 earnings call.

In Alphabet We Trust

Through reorganization as a conglomerate, the move also lessens the glare of antitrust scrutiny on Alphabet. This is because each company within the Alphabet umbrella makes products for a different industry. Bunching all of them together under the search engine umbrella would have invited greater attention from regulators due to the unique nature of Google's business.

With the new corporate structure, Alphabet can always argue that each company within its organization operates independently of the search engine.

However, less obvious was the consolidation of power to be held by the two founders, versus the shareholders. The new entity was to be structured in a way that Page and Sergey Brin hold the majority of the voting rights, without the majority of the stock. This was done in order to prevent the company from drifting away from its vision due to pressure from investors to perform financially.

Inventing a New Company Within a Company  

Google's founders, Larry Page and Sergey Brin, have always had a healthy disregard for the impossible. They imbued this thought process into their company's DNA, making Google a fount of innovation within Silicon Valley, where innovation is a byword instead of a buzzword.

But many of Alphabet's attempts at innovation have, in fact, flopped. The company's attempts to reinvent itself as a hardware and Internet of Things (IoT) player have also come under constant scrutiny by the media and Wall Street. Page, who returned as CEO in 2010, lashed out against the criticism, calling for a “safe place” for innovative companies to carry out experiments at Google I/O in 2013.

The separation between search, Alphabet's main business, and other companies provides the company with a “safe place” to carry out experiments. Each company within the Alphabet umbrella is headed by a CEO, who reports to the Alphabet CEO, who allows the respective head to determine the best course of action without worrying about the effect on the search engine cash cow.

It also avoids negative public relations (PR) through direct association with the search engine business, which makes money by inferring user interests. For example, Google's acquisition of the home security company Nest raised privacy concerns.

The Bottom Line 

According to the author of Google's ten commandments, Larry Page and Sergey always had a bigger picture of technology's role in the world. “Larry's vision was always to be something like General Electric (GE), and Google was only his first proof-of-concept,” he is quoted in the New York Times. The reorganization was Page and Brin's attempt to streamline operations to focus energies on new ventures and evolve Google from a one-trick pony to a conglomerate.