Google, Inc. (GOOGL), one of the most influential technology companies of all time, has recently announced a new corporate structure, and placed itself under a new holding company it created, called Alphabet, Inc

What's In A Name? 

Google cites a couple of reasons to explain its new name, Alphabet:

  • Alphabet, to quote Google's official blog,  "means a collection of letters that represent language, one of humanity's most important innovations". This new name syncs well with Google's innovative culture.
  • "Alpha" in financial terms refers to an investment return above benchmark--which Google obviously strives for

But there's more to this name change (and corporate change), with a lot more business implications.

Here are the top 5 reasons why Google decided to re-brand itself under a new identity, and how this will change the company as we know it:

  1. A Message To Shareholders: The founders, Larry Page and Sergey Brin, had installed a corporate structure that kept them shielded from shareholders' pressure, and allowed them full freedom to try innovative ventures. But it also led to complains from shareholders about the lack of clarity regarding risky investments. There were no paybacks to shareholders in the form of dividends or buybacks. It made investors uneasy, and led to Google's stock prices going stagnant for a long while, despite the company's long-term value creation. With Alphabet, Google founders have conveyed their intentions to bring about more clarity in their style of work. This change will introduce much-needed transparency among the shareholders. There are precedents supporting this: In April 2015, Inc (AMZN) was successful in winning investors’ confidence when it started reporting its numbers separately for its Amazon Web Services (AWS) segment. The result was seen in an immediate price rise in its stock. (See related: How Does Google Make Its Money?)
  2. A Message to Analysts: Any big business with a diversified set of products, services and operations bundled together, is extremely difficult to analyze and evaluate even for professional analysts. Google has often been accused of maintaining an opaque and large-sized monolith structure, where no outsider would know the developments going behind the curtains. With this change, hopes are high that details about individual businesses (now subsidiaries under Alphabet, Inc.) will become available. There is likely to be more information about cashflows from one segment to the other, allowing better analysis and valuation of the overall business.
  3. A Path toward More Ambitious Initiatives: The erstwhile Google group is known for innovation. This new setup, with each subsidiary company operating independently under a distinct management regime, will allow new ambitious ventures to take off smoothly. The core group will no longer spend their time and energy on the day-to-day operational issues of different businesses that are already well-established. Management of pre-existing ventures will be handled by newly-appointed management executives for each respective business. Free from such responsibilities, the core Alphabet team will instead focus on new ventures, bringing about path-breaking offerings that may result in windfall gains for Alphabet shareholders.
  4. Addressing the Challenges of Diversification: The futuristic and crazy-seeming initiatives that the erstwhile Google organization took up in last few years are too diverse from its core internet-based search business--for example, self-driven cars, life science projects, and venture funding. Managing such a diverse set of business operations was creating a bottleneck under the single organization. With this restructuring, each business will operate independently. Though the traditional money-making businesses will continue to fund the new initiatives under other subsidiaries, more clarity is expected to be available on such matters as detailed business segment reporting of segment level cashflows. This would allow clearer insight into where the money is coming from and where it is going. (See related: The Business of Google)
  5. Borrowing Best Practices: The move by Google is seen similar to that of Berkshire Hathaway Inc (BRK-A). It remains a listed company, but operates as a private equity firm. With the core insurance business running successfully, Berkshire has made successful investments in various diversified industry sectors including ketchup, batteries, and airplanes. General Electric Co. (GE) also tasted success with this model, when they diversified from an electrical company to numerous other sectors including jet planes, security systems, and medical equipment, under different subsidiary companies. Alphabet may soon emerge as a large conglomerate similar to BRK and GE.

The Bottom Line

Companies make changes to their organizational structure occasionally. Alphabet may not see any immediate changes in valuations, as each share of Google will simply be replaced by one share of Alphabet. However, the detailed segment level reporting, targeted focus of management, and mitigation of the effects of diversification are expected to bring about a positive impact on Google's ongoing and future ventures. Companies like GE and Berkshire Hathaway have tasted success with similar developments in recent past, and Alphabet shareholders can similarly expect to see intrinsic value appreciation.

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