Google is effectively moving to become a conglomerate, which helps explain why CBS News contributor Mellody Hobson compared the new structure to Berkshire Hathaway (BRK.A) Tuesday morning on CBS This Morning. Here are five goals that the company could achieve with the new structure.
Google has long had wide-ranging interests, including search and display ads, cloud services, enterprise applications, data center technology, self-driving cars, mobile operating systems, notebook operating systems, data transmission services, life sciences and longevity, and video hosting and streaming, to mention a few. In a single company, the danger is that some aspects overshadow others.
Microsoft (MSFT) is a great example. For many years Windows and Office stunted the development of other aspects like mobile, to the eventual detriment of the whole company. With individual companies like Google for search, YouTube for video and Calico for longevity, the new Alphabet could allow each organization to give the necessary attention to its field.
An organization needs places for the career advancement of talented people. One reason Marissa Mayer went to Yahoo (YHOO) is that it was clear she had gone as far as she could at Google. Now there will be more CEOs, vice presidents, CFOs and mid-level management positions to accommodate employees who want to grow but stay with the company. The diversification also lets employees shift to work for different people if a match with one management team doesn't work well.
Many of Google's interests are very early stage, which means they're losing money. That can mean owning valuable tax write-offs that are still developing new technologies with major value. In addition, the overall company will have more entities for holding and cross-licensing technology, which opens new opportunities to shift assets around the world and to use legal loopholes to reduce taxes.
The day may come when one of Alphabet's interests would be of far greater value sold to another company. By having them as separately incorporated organizations, such a transaction can happen with relative ease without disrupting the other branches.
Investors have wanted more transparency in how Google made and spent its money -- and theirs. This approach should help provide such visibility. Additional benefits could come to investors. The current ruling troika of Larry Page, Sergey Brin and Eric Schmidt will stay atop the whole structure. Alphabet could still keep controlling interests of each of its parts and yet potentially have any or all of them go public, letting more people own shares and raising more money for business activities.
For all the positives, conglomerates have their own challenges. The structure was popular in the U.S. for decades but eventually fell out of favor in the 1980s because they mostly became unwieldly, had too many layers of management and were poorer at creating shareholder value than more focused companies. It may be that Alphabet is signaling the first of a new wave of explicitly formed conglomerates as part of the pendulum that business sees, swinging first toward one extreme and then back again.