Alphabet: Less Than Meets the Eye

By James Kwak

The reorganization of Google into Alphabet means … well, not very much, at least for now. Instead of everything being inside one big corporation called Google, now there will be a bunch of corporations (one of them called Google) all owned by a holding company called Alphabet. “Holding company,” in this case, means that Alphabet will have no operations of its own: it will be a corporation that simply owns all the other corporations.

This is supposed to have something to do with making the company “cleaner and more accountable,” “empowering great entrepreneurs and companies,” “improving transparency and oversight,” blah blah blah. In itself, however, it does none of this.

There is no substantive difference between a corporation with a bunch of divisions and a corporation fully owning a bunch of other corporations. In both cases, the CEO at the top of the pyramid has complete control over everything that happens within the entire structure, and is accountable to no one except the board and shareholders of the top-level corporation. As for transparency, there’s no rule saying that any corporation has to release audited financials, or have audited financials in the first place, or publish any financials at all (except for tax filings, which are not public). The rules requiring disclosures only apply to publicly traded corporations, and in the new structure, there is still exactly one of these: Alphabet, which still owns everything.

The new Alphabet is planning to release financial information for its new Google subsidiary, but that’s purely voluntary — and it’s something they could have done already. Any corporation always has the option of disclosing more information than it is legally required to, and most public corporations take this opportunity to release information that they think will help them with their investors (if only because many investors are unwilling to buy stock in companies that don’t say anything about how their numbers break out across product lines or regions).

Alphabet’s subsidiaries will each have a CEO and, presumably, a board of directors. This could be good, it could be bad, but most likely it won’t make a difference. There’s no reason you couldn’t call the head of an operating division its “CEO” instead of “president” or “general manager” as is the case today. Nominally a corporation has to have a board of directors, but in the case of an Alphabet subsidiary all of its members will be named by Alphabet. So to the extent that the board does anything, it will be less efficient than the current situation, in which Larry Page can simply call the head of, say, Nest, and tell him what to do. And to the extent that a subsidiary corporation duplicates any of the infrastructure that is currently handled at the top, Google level (finance, HR, IT, etc.), that’s simply a waste. However, the most probable outcome is that Alphabet will continue doing what Google is doing today: the various subsidiaries will be semi-autonomous, doing some things independently and drawing on shared resources for others.

While we’re at it, let’s clear away the too easily bandied about comparisons to Berkshire Hathaway. Berkshire is a corporation that owns other corporations. But that’s because Berkshire is Warren Buffett’s investment vehicle: he uses it to buy companies that he thinks are undervalued, like most recently Precision Castparts. The companies that Berkshire buys have nothing to do with each other, or with Berkshire’s historical insurance business, so of course Buffett leaves them intact. That also makes sense because he may want to sell them someday, or at least preserve that option. Google, by contrast, has never bought a company solely as an investment play. It has always done so because of supposed synergies between the acquisition and Google’s other businesses. When Alphabet starts buying companies that have nothing to do with its existing companies, then you can start comparing it to Berkshire.

In short, the reorganization of Google into Alphabet doesn’t change anything about how the company has to behave, so any actual changes are things that could have been done without the reorganization. The corporate structure will only really matter if investors can own stock directly in the subsidiaries, so a subsidiary could have a different shareholder mix from Alphabet. Then a host of new rules could apply, including required financial disclosures on the subsidiary level and restrictions on transactions between the subsidiary, Alphabet, and the other affiliates in the group. Then the subsidiary would have to be run independently for the benefit of its shareholders — which is good from its shareholders’ perspective, but bad from the perspective of the conglomerate as a whole, because it limits flexibility.

This week’s reorganization could be a preparatory step in that direction — but, then again, it might not. It’s not clear if Larry Page and Sergey Brin have a master plan. And, if they have a master plan, there’s no particular reason to think it’s a good one. Page and Brin are obviously the technology world’s version of geniuses, having invented the original Google search algorithm and turned it into the world’s dominant search and online advertising business. But there’s no reason to think they have any particular insight into questions of corporate organization. For decades (if not centuries), everyone has known that there’s a basic trade-off between consolidation and autonomy, and that as you get bigger and bigger it gets harder to run everything on a fully consolidated basis.

These days institutional investors tend to distrust companies that combine too many businesses under a single corporate umbrella, so as time passes the pressure on Alphabet to break itself up for real will only grow. In the meantime, the new structure is not a best of both worlds, because there is no best of both worlds: you can’t have a corporate structure that provides maximum autonomy and transparency on the subsidiary level and also permits maximum coordination across the entire group. Not even if you are a Silicon Valley billionaire.

[Also posted at Medium.]

9 thoughts on “Alphabet: Less Than Meets the Eye”

  1. “Google, by contrast, has never bought a company solely as an investment play. It has always done so because of supposed synergies between the acquisition and Google’s other businesses. When Alphabet starts buying companies that have nothing to do with its existing companies, then you can start comparing it to Berkshire.”

    Is that true? What about their life sciences division and Calico? I think you could be right, but I could also argue that Google has tended to invest in synergies to avoid getting criticized for lack of “focus”. I interpret this as a signal that they’re laying the groundwork that will allow them to make investments in completely unrelated businesses without tanking the stock. If you’re an analyst or investor who views their diversions as a wasteful distraction, now’s the time to exit.

  2. Obviously the founders of Google aren’t investing in self driving cars, anti-ageing, internet for the masses, or general AI to make money, or at least not strictly to maximise shareholder returns. They do it because they can, because it’s exciting, because they want to change the world and leave their mark on it. Mostly I think their efforts are for the good.

    Presumably they feel the new structure facilitates them, personally, to pursue these interests. It’s like Richard Branson who sold or made autonomous various Virgin brand businesses so that he could have fun with spaceships. Again as far as uses of private money and power go, this is a fairly positive one.

    For the rest of us, the Google that’s left (the internet company) is slightly less good. The founders are slightly further away and Google is slightly more likely to do evil or become like Microsoft.

    But on the other hand, Google was on its way to be the everything company: All your computing services, your identity, payment service, media content, navigation, phone, your car, house automation, maybe in the future health services or your AI friend. This level of consolidation is already dangerous. Establishing at least some walls, and maybe in the future independence of the parts, makes power that Alphabet has amassed a little more palatable.

  3. al·pha·bet soup
    noun\
    incomprehensible or confusing language, typically containing many abbreviations or symbols.

    “Yup, Google actually served alphabet soup for lunch today.”
    Business Insider
    —————————
    “The alphabet agencies (also New Deal agencies) were the U.S. federal government agencies created as part of the New Deal of President Franklin D. Roosevelt. …Democrat Al Smith, who turned against Roosevelt, said his government was “submerged in a bowl of alphabet soup.” https://en.wikipedia.org/wiki/Alphabet_agencies
    —————————
    https://en.wikipedia.org/wiki/Alphabet_soup_%28linguistics%29
    Alphabet soup (linguistics) is a metaphor for an abundance of abbreviations or acronyms,…
    Soup is also a rumored name for one of the companies owned by Alphabet (https://abc.xyz)

  4. I thought it was fairly straightforward that Google is lining themselves up for more diverse investments, the option to attract top entrepreneurial talent that would like to develop their own companies, and to have the option to more easily spin them off at least in part to create more value if they become successful.

  5. @Pavlos who wrote, “Obviously the founders of Google aren’t investing in self driving cars, anti-ageing, internet for the masses, or general AI to make money, or at least not strictly to maximise shareholder returns. They do it because they can, because it’s exciting, because they want to change the world and leave their mark on it. Mostly I think their efforts are for the good.”

    Not so obvious, I’m afraid. Yesterday’s “technologies” adopted by and profiting the entrepreneur enter the stream of today and tomorrow. We stand on the shoulders of all who came before us, no? Or we should, otherwise we are merely re-indulging in Nihilism, Hedonism, and Anarchy – the enduring animal nature philosophy extolled by the shamans with their majik gizmos – the “greed is good” religious believers…

    If blowing out a hole in the side of a mountain releasing toxic waste into the riparian ecosystem used by farmers, ranchers and “consumers” across the four corners area of the southwest

    coupled with a time lapse of 24 hours before any PSA (public service announcement) was sent out via a form of communication that would reach ALL people at once, not just those paying for access to information they need to know for health and well-being in order to give people downstream a chance to make their lives less miserable by ACTION – diversion of the toxic stream away from private water holes or hitting a shut off valve, or filling up water storage units with good water while they still had acess to good water…etc…

    isn’t enough of a “today” situation to fairly ask whether the shamans of tomorrow’s majik sticks have any power to stop the destructive forces of the past’s majik beliefs in the value of “gold”

    http://www.kunc.org/post/why-was-environmental-protection-agency-messing-mine-above-silverton#stream/0

    then I do not know when it will be fair to ask about the misallocation of too much capital away from the daily basics of life-maintenance into apps, schmapps, and driverless cars (78% of people asked in a poll said they did NOT want a driverless car).

    A new circus is coming to town, for entertainment purposes only…

  8. Stock splits are not supposed to have any effect upon corporate value, but studies show that they do. Perhaps this reorganization signals something of relevance to stockholders. What has been created is not just a conglomerate but a unique venture capital incubator scheme, and the corporate structure could simplify the process of spinning off subsidiaries that are ready to take the next step. It remains to be determined whether this scheme will be successful, but at least it signals the possible willingness of the parent firm to “graduate” some of its ventures to stand on their own. Do you see any such willingness on the part of Apple? A standard corporate law assessment seems to miss the deeper significance of this reorganization.

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