Google Inc is no longer going to own itself. The firm will, later on this year, become a wholly owned subsidiary of Alphabet. The corporate structure, which was revealed in a surprise statement from Google CEO Larry Page on Monday afternoon, was a surprise, and analysts on Wall Street are blindly guessing the reasons behind it.
Though Mr. Page has promised that the new deal will bring more transparency to Google, that’s not likely what he’s after. The firm’s co-founder, who will be replaced at the head of Google by Sundar Pichai, will lead Alphabet as CEO. The new structure makes Google look like Berkshire Hathaway Inc, and Warren Buffett’s firm may be the best place to look for clues about the future of Google.
Google loses interest in search
Sergey Brin hasn’t involved himself publicly in anything like Google core business in a long time. The co-founder, who will be the President of Alphabet, has kept himself to more esoteric projects. Google’s robot cars, Google Glass, and Google X don’t make any money, but Sergey Brin loves to spend it on them.
Larry Page appears to be of the same mind. His passion lies in Google projects like Calico. The research project, which focuses on extending the life of people, will become one of the major new units of Alphabet.
With both founders working in areas that don’t concern search, it makes sense for Google to switch its structure in order to give a wider berth to them. Shareholders, constantly asking inconvenient questions about the wastefulness of the non-core businesses, will not be able to criticize the leaders quite as much as long as the core business is ring fenced and separate from the rest of the projects.
Buying out the competition
Warren Buffett no longer simply runs a fabric factory, and Berkshire Hathaway is a massive conglomeration of firms in several different industries. Larry Page appears to have similar ambitions. Alphabet, with Google printing cash for it, will likely make a spate of investments in order to build out its major projects.
Google has already been doing this over the last few years, of course, but now it’s being clearer about its ambitions. Berkshire Hathawy did this years ago, using the insurance business, lead by Geico, in order to give it the cash it needs to make ever larger purchases.
Warren Buffett now owns a large part in almost every industry. Larry Page seems to want to do the same, but he’s going to focus on new ideas that just might change the world rather than ones that will pay a solid dividend.
Alphabet will be on the cutting edge of everything from life-lengthening treatments to RoboCars to internet provision. That list may get longer if Google seeks to copy the work of Warren Buffett in the years ahead.
Finding new ideas
Two of the new concerns under the Alphabet structure will be of little use to those with shares for the time being, but could play out very well in the long term. Google X, the segment that handles ideas like the firm’s Google Auto project, and Google Ventures, which invests in startups, will be key to the long term future of the firm.
Warren Buffett doesn’t have anything like that, because he stays away from fast-growing firms. Google looks set to embrace that fast-paced world. Google is sitting on more than $70B that it can use to invest in up-and-comers.
Page and Brin will be able to step back from the search world in order to focus on those nimble firms. They’re promising that the new firm will be an “Alpha-bet” bringing market-beating returns to those holding shares, and giving the world access to new tech faster at the same time.
Becoming Warren Buffet
Buffett and Page have very different principles, one lead by value and the other by growth. Give the way the market reacted to the Alphabet announcement, Wall Street is happy with the dichotomy. At time of writing shares in Google Inc were up by more than 6 percent in pre-market trading.
The way that Alphabet and Berkshire Hathaway are structured will share a lot of similarities. Both will be lead by cash generating businesses that allow massive buyouts in other areas. Both seek to make investors look at the group of firms as a whole rather than keeping focus on the single concern that generates that cash.
Becoming more like Warren Buffett will, in terms laid out by Mr. Page, allow the firm to give more to investors and increase “transparency and oversight of what we’re doing.” Warren Buffett puts a lot of focus on those that own part of his firm, and Google appears to want to do the same with its new structure.
Betting on the future of Google Inc
Ross Sandler of Deutsche Bank, in a report published on Tuesday morning, upped his price target on the new Google to $840. He said that “the newly announced push toward cleaner financial disclosure and new operating structure” were big reasons to own the firm’s shares.
John Blackledge of Cowen and Company also put his price target at $840. He reckons that the firm will now be valued as a sum of its parts, a change that should result in
Mizuho Securities’ Neil Doshi said that his three major problems with Google, up until now, have been “1)lack of transparency for investors; 2) an organization structure that is too large (55,000 employees) and not very nimble; and 3) the European Commission anti-trust lawsuit.”
Mr. Doshi says that the Alphabet change will fix the first two of those problems, and upgraded the stock to Outperform as a result. He has a new price target of $715 on the firm’s shares. He wants “segments can be valued in their own right” so that the margins of Fiber don’t drag down those of the firm’s core cash-making segments.
Betting on Google Inc is a risk, but Sandler sees the firm growing into a much larger valuation in the year ahead as those with shares get used to the new structure.
Larry Page, his ambitions lying beyond search many years ago, will be able to focus on buying and funding the best new firms, in order to bring growth to the firm. He’s trying to become the Warren Buffett of the growth world, and Wall Street, so far at least, seems to think it will pay off.