Tuesday, August 11, 2015

GOOG: Alphabet Could Be the Berkshire of Tech

Alphabet gives Google's projects the room to roam that they need

Late Monday, Google (GOOGL, GOOG) CEO Larry Page released a blog post explaining that, effective immediately, he is abdicating his position to become CEO of a new company, Alphabet. Longtime friend and Google co-founder, Sergey Brin, will accompany Page as Alphabet’s president.

Google, now a wholly owned subsidiary of Alphabet, has been “slimmed down” to separate its “moneymaking businesses from the moonshot ones.”

For all intents and purposes, GOOG stock will remain unchanged: All outstanding shares of Google will immediately convert into Alphabet shares, but the new parent company will continue trading on the Nasdaq exchange under the existing GOOGL and GOOG tickers.

Sundar Pichai, whose meteoric rise from low-key manager to product chief put him in the co-pilot’s seat of the world’s most powerful technology company, has been promoted once again to the position of Google CEO.

Pichai will continue to develop and grow Google’s key products — Search, Maps, Android, YouTube and its advertising network — while “the companies that are pretty far afield of our main Internet products [will be] contained in Alphabet instead.”

Simply put, Google is still the same dominating Internet search behemoth, only now with more focus. Aspects of Google that aren’t directly related to advancing the company’s Internet presence and influence in the technology industry (such as the glucose-sensing contact lens from Life Sciences) can now continue R&D efforts without impacting the rest of the company.

Could Alphabet Become the Next Berkshire Hathaway?

By forming Alphabet to become Google’s parent company, and separating its various unrelated businesses, Page and Brin have essentially duplicated the setup of Warren Buffett’s multinational conglomerate holding company, Berkshire Hathaway (BRK.A, BRK.B), which currently owns approximately 60 businesses ranging from insurance to clothing to diamonds.

While the mix of businesses under the Alphabet umbrella isn’t as varied as Berkshire’s, many of Google’s projects have simply grown too large too quickly, straining Page and Brin’s focus andpotentially threatening GOOG stock. Splitting Google up by way of Alphabet allows Page and Brin to pursue such projects without hindering or neglecting GOOG’s bread and butter.

Plus, thanks to the massive resources developed and maintained by Google, Alphabet will be able to provide each business with sufficient capital and the freedom to expand independently of the other businesses under the Alphabet umbrella. This will allow Alphabet to reap the benefits of each individual business, providing resources and capital where necessary.

As Larry Page explained it:
“In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed. We will rigorously handle capital allocation and work to make sure each business is executing well. We’ll also make sure we have a great CEO for each business, and we’ll determine their compensation.”
So, while Page and Brin are technically no longer running Google, their leadership roles aren’t much different, as Alphabet’s parent position now oversees both Google and each of the carved-off businesses that were once part of Google.

Bottom Line on Google and Alphabet

Larry Page and Sergey Brin now head up Alphabet, the newly formed umbrella conglomerate that was once Google — and still is, really. Their purpose in creating Alphabet is to avoid getting too comfortable, instead attempting to remain true to their original message: “Google is not a conventional company. We do not intend to become one.”

Shareholders responded positively to the news, with Google stock jumping more than 6% in after-hours trading to a premarket price of more than $705 per share by early Tuesday morning. The price has since corrected to around $655, a 3% increase nevertheless.

With the freedom and flexibility that will come from Alphabet, Page and Brin will be better equipped to grow, fund and operate fundamentally different businesses without the headaches associated with actually running each of them.

In the long run, this is definitely a bold move that will pay off for GOOG stock. Eventually, who knows, Google might have a business for every letter of the alphabet.

Article originally appeared on InvestorPlace (08/11/2015)

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