Why Google Is Restructuring Now

Google is undergoing a massive corporate restructuring, forming a publicly traded umbrella company called Alphabet Inc., which will hold many subsidiary corporations such as Google Inc., Google Ventures, Google Capital, and the X lab. The change was announced in a blog post Monday afternoon, mentioning not only the more banal (how the restructuring may allow present division heads to become CEOs of spin-off companies instead) but also the more bizarre (how some of those spin-offs, like Calico, will deal with human immortality).

In a way, Alphabet Inc. won't be much different from the Google of today. "Functionally, substantively everything is the same. Same businesses. Same people. Maybe the same people running the same businesses, maybe some changes," said Michael Klausner, a professor at Stanford Law School and Stanford Graduate School of Business. Nonetheless, the Google announcement still hints at grander plans—a Google conglomerate, similar to Warren Buffett's Berkshire Hathaway, composed of many disparate holdings, from the classic search engine, to a self-driving car manufacturer, to medical research and development companies. Alphabet is the first step towards the Google of the future.

Boy, as a consumer, I sure am excited about Alphabet being the new parent company of Google because that's easy to understand & benefits me!
— Anil Dash (@anildash) August 10, 2015

What does this mean for shareholders?

Current Google shareholders now own Alphabet stock. Google shares will be converted into Alphabet shares "having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of Google stock," according to the SEC filing. The same dual share structure currently in place with Google Inc. applies to Alphabet Inc.—in other words, everything is exactly same.

So Alphabet is exactly the same as Google?

Yes. And no.

"The company is controlled by the two founders. They have the dual-class structure and voting control. Other than changing a name, is there much happening differently?" said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "The name changes but things sound like they pretty much stay the same."

Klausner agreed. "If you walked in tomorrow it would look the same. If you walked in after they did the restructuring it would look the same."

But even though the actual structure of the organization is functionally the same, the formalities could make a difference. Spinning divisions off into separate companies means that division heads can now become CEOs of large companies. "You have a number of long-time people who've been at Google, and eventually they want to run their own things, run their own shows," said Danny Sullivan of Calafia Consulting, who runs the popular news blog Search Engine Land. "It's hard when top management is locked in and you can't really change it."

How does any of this actually "improve transparency"?

Google cites "improving the transparency and oversight of what we're doing" as one of the things it is looking forward to with the restructuring. What it's referring to is probably the plan to report the new, "slimmed-down" Google Inc.'s financials separately from the rest of Alphabet's holdings. So shareholders will get to see how the core business of "main Internet products" perform, and then they'll get to see the financials of the rest (including the "moonshot" projects like Google Glass or the self-driving cars) lumped together.

But the reorganization itself isn't responsible for this new "transparent" format—this is just something Google is promising to do voluntarily. And it's something that Google could be doing already. According to Klausner, "It's not impossible to do that with divisions but it's easier to do it with separate corporate entities."

Does this mean there are big acquisitions in the works?

One popular prediction is that Google is restructuring in anticipation of some big acquisitions. But Klausner doesn't see how restructuring would affect that. "If they have the cash, the stock or the inclination to do it, they can do it as Google."

On the other hand, Sullivan suggested that "Google has always been somewhat constrained, or people have wanted to constrain them, when they've made an acquisition or they've branched out." According to him, changes and acquisitions have been shadowed by questions of how new aspects of the business fit in with pre-existing aspects of the business (e.g., search or advertising).

By creating a holding company to envelope all of the Google projects, a Google acquisition will now be, theoretically, less threatening to founders of companies. Although some acquisitions, like YouTube, have resulted in fairly independent entities, many acquisitions have been wholly swallowed up (like how Keyhole became Google Maps) or simply shut down (like Dodgeball). An Alphabet acquisition on the other hand, doesn't need to be integrated with existing Google products—it can just be one more company under a larger holding company.

Of course, this assumes that Google really is going to change the way they do things. "If an acquired company operates as a separate subsidiary of Alphabet, and Sergey Brin doesn't like it or the CEO, the CEO will be fired," said Klausner. "There's not a tangible difference, unless this is a catalyst for some sort of change in the culture."

So why is Google even doing this?

It's not clear. Klausner suggested it was intended to be a "catalyst" to change company culture, allowing greater independence for the heads of certain individual projects, when those projects become separate corporate entities.

"One thing is that it makes it a lot easier for them to, you know, follow their dreams," Sullivan said, laughing a little.

Is Google now a conglomerate?

"Following their dreams" may involve becoming a massive multinational conglomerate that dominates nearly every aspect of modern life, from your presence on the web to your physical longevity.

The reorganization has been likened to Warren Buffett's multibillion dollar conglomerate Berkshire Hathaway, which has a massive portfolio including Geico, Fruit of the Loom, and Dairy Queen. But while Google's founders say the move will ensure greater transparency and clearer oversight of its projects, the similarly-structured Berkshire has become notoriously opaque over the last few years. The SEC has had to push the conglomerate to provide details on contracts and insurance claims.

The New York Times quoted David Larcker, a professor at the Stanford Graduate School of Business, questioning the move to become a conglomerate. "If you go backward in time, the gigantic conglomerates unraveled between the 1970s and the 1990s because it became too unwieldy to manage them."

Klausner disagreed. For Klausner, the corporate restructuring won't turn Google into something it's not already. "Dave might be right that in the past, in the last generation, conglomerates were considered inefficient," he said. "But Google is a conglomerate already—to the extent that Google has a number of businesses, and to that some people attach the word 'conglomerate.'"

To Klausner, the Google corporate structure doesn't resemble anything like the "gigantic conglomerates" that started falling apart forty years ago, such as International Telephone & Telegraph, once known as the archetypal conglomerate. "The old ITT had lots of businesses. They were large and didn't have any economies of scope. They didn't have any significant relationship with one another."

But maybe that's the point. What do search engines and video and Calico and self-driving cars have to do with each other, anyways?

It does all prompt the question of how the financial structure will actually work. It's one thing to have a conglomerate of underwear manufacturers and milkshake vendors, it's another to have a conglomerate full of wacky proofs-of-concepts, plus a sensible, sober, "slimmed-down" Google Inc. Nonetheless, Alphabet is still the Google we knew yesterday. It's just a little more honest about how bemusing it really is.