Google Inc (GOOGL) recently announced it will reorganize into a new corporate structure of eight separate companies headed by an umbrella company called Alphabet. This article takes a closer look at the reorganization and what it will mean for shareholders. (See related The Basics Of Corporate Structure and Understanding Corporate Structure - Video.)

The Change at Google

Companies reorganize for many reasons, for example to streamline business segments, build investor confidence, increase operational efficiency, or spin off an unprofitable area. Under the recently announced change, Google Inc will split existing Google businesses into eight separate subsidiary companies. Google will now mean just the core search and technology business. Google Ventures and Google Capital will be two companies focused on venture capital, investments, and finding other businesses and technologies to acquire. Google Fiber will focus on providing Internet access. Google X will include the self-driving car research and development program. Nest will focus on thermometers and other home technologies. Calico labs is the anti-aging biotech firm. Each of these businesses will have its own management and independent business strategy with Alphabet as the parent company. (See related Why Google Became Alphabet.)

Business Insider provides this graphic of the new Alphabet structure. Note that each subsidiary company will have its own CEO.

People and Management Changes

Google Inc cofounders Larry Page and Sergey Brin will become the CEO and president of Alphabet, respectively. The two will focus on new ventures, rather than manage existing ones. Google Inc has already diversified into robotics, self-driven cars, life sciences, healthcare and anti-aging research. Expect many more diverse projects launching under Alphabet, possibly adding new streams of revenue. The day-to-day business operations of existing ventures will be delegated to the new CEOs.

The managerial seeds for this change were sown much earlier. Back in October 2014, Sundar Pichai, who will be the new CEO of the Google search and technology business, was given responsibility to run Google Inc.

Changes for Shareholders

The company will replace all existing shares of Google Inc with an equal number of shares of Alphabet. Both classes of shares (GOOGL and GOOG) will continue to trade on the NASDAQ under the same names. In essence, nothing changes for shareholders. Google Inc shares will simply be held under the new name of Alphabet. But there’s a lot more potential to this change. (See related GOOG or GOOGL: Which Google Should You Buy?)

The Challenges of Transparency

Google Inc has often been accused of lacking transparency. Operating as one, large monolithic company, investors had little clear information about how each of the separate Google Inc businesses were performing. For instance, Google Inc released no details on how much money YouTube, Android, Nest, or its ads, and search businesses were making on their own. Similarly, there was no information on how much the company has been spending on new ventures like self-driving cars. (See related How Does Google Make Its Money?)

Google Segment-Level Reporting?

The reorganization means that Google Inc (or Alphabet) will increase transparency. Shareholders should not expect too many details, however. The new Google search and technology subsidiary still encompasses most of the moneymaking businesses like YouTube, Android, search, ads and apps. It’s quite possible that, hiding behind the main Google subsidiary, all granular details of these cash cows will continue to remain opaque. (See related The Business of Google.)

But shareholders can now expect to receive detailed information about other risky, ground-breaking projects. Except for the core Google search and technology subsidiary, every other Alphabet subsidiary is apparently losing money at present. Most are being run on an experimental basis and are incurring costs without generating any revenues. For example, there is no revenue from the self-driving care project, only expenses. Nest and Google Fiber are also not known to make money, but they may indirectly support Google’s core search and ads business. Such granular details will emerge in the near future, as analysts expect that the financial breakup will be reported in upcoming quarterly results. Analysts and investors will now be able to make better predictions and estimates. Risk assessment will also become more straightforward with access to information about spending and business potential in each subsidiary.

Similar Historical Instances

Google Inc is not the first large company to reorganize in this way. In its April 2015 quarterly report, Amazon.com Inc (AMZN) split its business segment reporting by showing separate results for its cloud-based Amazon Web Services. Since then, Amazon has seen approximately a 35% increase in share price. Investors were able to gain clearer insight into the different lines of business and their potential, and that reflected positively in the increasing stock price.

Alphabet is expected to follow a similar method of segment reporting, as mentioned in its filing. Investors can expect to gain more clarity into the core Google search and technology subsidiary’s profitability as well as details on the earning potential of the more experimental subsidiaries. This could lead to either an increase or decrease in Alphabet’s share price. 

Berkshire Hathaway Inc. (BRK.A) has similar history. The Warren Buffet-led company has insurance as its core business, but it also invested heavily in ventures as diverse as private jets, ketchup and batteries. General Electrical Co. (GE) has a similar success story of diversification. Today Berkshire Hathaway is one of the richest companies. Alphabet may be on a similar path.  

Immediately after the announcement, Google Inc share price went up by 5.7% and touched a high of $704, indicating positive investor response to the reorganization. CNBC reports that “of 50 analysts covering Google, 43 have a ‘buy’ or higher rating on the stock and seven rate it ‘hold.’ The median price target is $750.”

Expectations from Shareholders

Shareholders expect profitable companies to regularly provide returns in the form of dividends or share buybacks. Google Inc is not known to do any of these. Rather, Google Inc has been investing its profits back into new, risky and unconventional projects. This approach has resulted in capital appreciation for shareholders who have held the stock long term. 

The Bottom Line

Companies make occasional changes to their organizational structure. As for Google Inc (now Alphabet), nothing is effectively changing in terms of price, volume or even valuations. However, this organizational change will unlock the detailed segment-level reporting which, if investor’s view the information as positive, may drive up the price of Alphabet shares. Companies like Amazon have had success with this approach and Google Inc/Alphabet shareholders can expect to see intrinsic value appreciation as well.

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