Google throws massive curveball in new structure – Alphabet vs. Google
Google Inc. (NASDAQ: GOOGL) is creating a new public holding company called Alphabet Inc. This represents what may be a paradigm shift in the reporting structure, as well as who is running the day to day operations at Google. It is also going to leave many shareholders scratching their heads.
Google is going to be asking shareholders to trust management here, albeit new management. Without much surprise, Google shares rose 5% or so in the afterhours session on this news. The belief here is that this streamlines the business structure. Still, we have to see what this really means for the Google structure and holders before making a final judgment — and a lot of the issues here will not be known for quite some time.
The new operating structure is said to increase management scale and focus on its consolidated businesses. The main Google business will include search, ads, maps, apps, YouTube and Android and the related technical infrastructure.
Businesses such as Calico, Nest, and Fiber, as well as its investing arms, such as Google Ventures and Google Capital, and its incubator projects, such as Google X, will be managed separately from the Google business.
Under the new operating structure, Larry Page will become the Chief Executive Officer of Alphabet and Sergey Brin will become the President of Alphabet. Dr. Eric Schmidt will become the Executive Chairman of Alphabet, with Ruth Porat being the Senior Vice President and Chief Financial Officer of Alphabet.
David Senior C. Drummond will Vice President, become the
Corporate Development, Chief Secretary of Alphabet.
Larry, Sergey, Eric and David will transition to these roles from their respective roles at Google, whereas Ruth will also retain her role as the CFO of Google.
After the completion of the Alphabet merger, Sundar Pichai will become the new CEO of Google Inc. — he is currently the Senior Vice President of Products at Google, and he oversees product management, engineering, and research efforts for Google’s products and platforms. Prior to his current role, he served as Google’s SVP of Android, Chrome and Apps.
Google calls this a “Holding Company Reorganisation” and it will result in Alphabet owning all of the capital stock of Google. The company said that “upon consummation of the Alphabet Merger, Google’s current stockholders will become stockholders of Alphabet. The stockholders of Google will not recogniSe gain or loss for U.S. federal income tax purposes upon the conversion of their shares in the Alphabet Merger.”
Following the consummation of the Alphabet Merger, shares of Class C capital stock and Class A common stock will continue to trade on the NASDAQ Global Select Market under the symbol “GOOG” and “GOOGL”, respectively.
Upon consummation of the Alphabet Merger, the directors of Alphabet will be the same individuals who are the directors of Google immediately prior to the Alphabet
Here is where this gets to another “trust me” area for shareholders. The financial reporting’s new legal and operating structure will be introduced in phases over the coming months and when finalised, Google anticipates that it will result in two reportable segments for financial reporting purposes, with the Google business presented separately from other Alphabet businesses taken as a whole. Accordingly, Alphabet will report its results under this new structure commencing with its Q4 earnings release and its Annual Report on Form 10-K for the period ending December 31, 2015.
Google also noted even more changes here. Concurrently upon completion of the Alphabet merger, Omid Kordestani will transition from his role as Google’s Chief Business Officer to become an Advisor to Alphabet and Google.
Google’s official blog post said: “What is Alphabet? Alphabet is mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead. What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose sensing contact lens), and Calico (focused on longevity). Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related. Alphabet is about businesses prospering through strong leaders and independence. 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.”
The long and short of the matter here is that investors are going to have to play a game of wait and see before they really understand how this works out. When Google conducted its stock split that it was really an issue of taking more control by creating the two public classes of shares.
Google’s shareholders already had to accept that they had no real vote that matters in how the company is run. Now they get that plus being confused over what the real structure will be ahead.