If you googled ‘corporate restructuring’ recently, it’s likely you were re-directed back to the internet search giant’s own website. This is because Google last week unveiled a mega-restructuring of its operations which will transform the listed Google into Alphabet Inc.
What is it?Google will create a new holding company — Alphabet — whose largest wholly-owned subsidiary will be Google. Confused? We all know the company’s core business — its internet search engine. Then, there are a host of other fledgling businesses — driverless cars, drone delivery and health innovations. What is more, while the search business makes money, the other fanciful ones don’t. With the restructuring, Google’s plan is to separate the two.
Alphabet will oversee this entire collection of businesses and will help the subsidiaries create their own identities and brands.
But why does such a company go through all the trouble of such a make-over? A company may restructure to combine similar businesses, separate unrelated ones, separate profitable divisions from dud ones, spin off saleable divisions or even neatly divide businesses between warring family members. If you recall, the Ambani group restructured to divide various business interests between brothers Mukesh and Anil Ambani. The Godrej group restructured to separate its low-margin chemicals business from the high-margin branded FMCG business. There are many such examples.
Both stock market investors and management gurus love companies that stick to their knitting (aka core competence). They don’t like it if a company is using the profits or cash flows from a successful business to dabble in a host of unrelated and risky ventures. They worry that such businesses may also soak up management time that is better spent on the main cash cow.
A restructuring like Google’s ensures that shareholders in the profitable and mature business aren’t saddled with the risks that come with such new business forays. Google had come under fire for using the success and cash flows from its search engine to fund its ‘moonshot’ bets on self-driven, smart-household devices and medical research.
Why should I care?If you’re a Google user (who isn’t?), you needn’t worry as good old ‘Google’ is here to stay. Every aspect of Google with which you interact — YouTube, Android, Maps, Gmail and, of course, the search engine — will remain intact. What is getting spun off are the ventures that are “pretty far afield of its main internet products”, as the management puts it. If you own Google shares though, you should brace for change.
The shares you own in the listed entity will now convert into Alphabet Inc, which will be traded on the US exchanges. Investors are also hoping that Alphabet will be a more transparent company than Google was, providing the break-up of revenues, profits and other metrics between the search engine business and other pie-in-the-sky ones. With the founders making all the right noises about ‘capital allocation’, investors are also hoping that they can now more easily track the flow of money between Google and its other riskier offspring.
The bottomlineThe next time you want to know more about the company behind Google, remember to google Alphabet.
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