Google surprised the entire market on Monday after announcing a corporate restructuring alongside the creation of a new umbrella company called Alphabet Inc.
We’ve already received a number of emails asking us to clarify exactly what this means for the company and how it will affect the stock. Tim told you guys a little about it yesterday, but this one’s worth the additional perspective, so I’m going to do my best to answer those questions in the following space.
In the simplest language possible, the company formally known as Google will soon be known as Alphabet Inc., a holding company and new conglomerate that will own several companies previously tied to Google.
The easiest way to visualize this new structure is to think about how Yum! owns KFC, Taco Bell, and Pizza Hut, how Unilever owns Dove, Axe, and Ben & Jerry’s, or how Procter & Gamble owns Tide, Gillette, and Pampers.
Google will be run by newly appointed CEO Sundar Pichai. Alphabet Inc. will be run by Larry Page and Sergey Brin.
Under this new umbrella company, Alphabet will own and handle the financial aspects of several subsidiaries including:
- Google Fiber
- Google Ventures
- Google Capital
- Calico
- Nest Labs
- X Labs
- And likely several others still to come
With Google Inc. now its own separate and slimmed-down entity, it’s likely the names of some of these subsidiaries are subject to change. Google X, for instance, will now simply be known as X Labs. Google Fiber could just become “Fiber,” and so forth.
In Google’s initial blog post announcing the creation of Alphabet, the headline read, “G is for Google.” Many are already speculating the company aims to cover the entire alphabet with its subsidiaries, though that would be a pretty ridiculous way to structure the conglomerate.
“That’s an excellent proposal, but I’m afraid we cannot accept. The letter ‘G’ is already taken. If you can return with something a little more ‘Z,’ we’ll be happy to reconsider!”
In any case, the most obvious reason for creating Alphabet Inc. was to provide structural clarification within the company and for investors. It separates Google from Alphabet’s many other projects, which seemed rather out of place with the Internet advertising company. Driverless cars, the connected home, fiber-optic Internet, and big data-inspired health care (Calico) had many confused as to exactly what Google even was.
In 2014, I actually wrote an article explaining “3 Reasons Not to Buy Google.” One of these reasons was, in fact, the element of confusion. Here’s a bit of what I said:
Ten years ago, Google was easily defined as a search engine company. Today, the market isn’t quite sure what it is or what it’s going to be.
Over the last decade, Google has made acquisitions in robotics, artificial intelligence, mobile phone manufacturing, satellites, and home automation, just to name a few industries.
For the rampant speculator, this is great news. In the future, Google could be selling driverless cars, providing robotic servants, or plugging you into the Matrix. But for everyone else, Google’s future is just as uncertain as it was in 2004.
As it turns out, this confusion was exactly the reason many weren’t buying. When Alphabet Inc. was first announced, investors cheered the additional clarity, sending the stock up from $633 to $670.
From a purely psychological standpoint, establishing the umbrella company Alphabet not only makes Google easier to understand, but it also makes the company look a lot bigger than it once did.
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Before Monday’s announcement, Google was an Internet company dabbling in various side projects. Now it’s being viewed as a massive conglomerate with a diverse focus across multiple industries… Well, at least that’s what Brin and Page want us to think.
The reality, though, is that the creation of Alphabet does not suddenly turn Google into a large and successful conglomerate. Yes, it provides the company with the ability to scale, but until we see any of these other subsidiaries begin to successfully monetize, Alphabet is still just Google under a different name.
More than anything, the creation of Alphabet puts additional pressure on businesses within Google that were previously able operate above the safety net of being “side projects.” By separating these businesses from the Google brand, Alphabet’s subsidiaries will inevitably receive increased levels of public scrutiny.
In the short term, this could prove damaging to Alphabet’s stock. Investors are going to want results, and we’re not going to see that happen immediately. Google Inc. will continue to thrive, but the perceived success of Alphabet will be diluted considerably.
In the long term, though, the corporate restructuring will likely prove to be a major benefit. The additional accountability that will be placed onto Alphabet’s subsidiaries is exactly what a few of these projects need to get up and running.
As for anyone who currently owns shares of Google already, no action will be required when the change to Alphabet becomes official. According to the regulatory filing, Google stock will automatically convert into Alphabet shares by the end of fiscal 2015. The ticker “GOOG” will remain as is, and the change also won’t require a shareholder vote or create any additional taxes.
Finally, it’s worth noting that the swap to Alphabet Inc. could result in some minor legal headaches for the company. The domain alphabet.com is already owned and used by German automaker BMW and its fleet management subsidiary Alphabet. There are also a number of small to midsize companies that already use the name Alphabet.
BMW spokeswoman Micaela Sandstede told the New York Times that the company does not intend to sell the domain and that BMW is now examining whether any trademark infringement has taken place.
For trademark infringement to occur, the duplicate name must result in confusion for consumers, according to the United States Patent and Trademark Office. Because Google is involved in the auto industry, BMW may wind up having a case.
Until next time,
Jason Stutman
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