Quick Thoughts: Google’s New ABCs

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The announcement that Google would reorganize itself and take the name Alphabet had the ring of one of the company’s infamous April Fool’s pranks, posted to the same company blog used for the annual tomfoolery. The name itself is whimsical, and if this announcement had been made a few months earlier, it would have been hard not to take it as an elaborate joke – think of Larry and Sergey jumping in front of Apple in alphabetical order, just as Steve Jobs once picked the name Apple because it preceded his former employer Atari in the phone book. The move to add a layer of management and take a conglomerate style structure runs counter to the trend toward spinouts in the world of TMT.

Still, despite the whimsy and surprise, this creative move makes sense. It is a signal that the company is willing to accept more accountability for its investments, which will be easier for investors to evaluate extracted from the core business. This change also gives those investments more attention from management, perhaps encouraging more a more aggressive agenda of investing in long term winners while culling ideas that don’t pan out more quickly. Businesses like Nest, Fiber, Project Fi, autonomous vehicles, robotics, Calico and others could benefit from a bit more light and visibility.

The move also opens more C level jobs for the company’s deep bench of executives, many regular targets of recruiters looking to fill CEO slots elsewhere. In particular, it elevates highly regarded Sundar Pichai to the top slot at Google, putting the operating responsibility for Alphabet’s revenue and profit engine in the right hands, leaving co-founders Page and Brin to strategic positions at the top of the holding company. Core Google has many promising opportunities on its plate, and Pichai can pursue them aggressively without the distraction of moonshots. This is a good thing for the company and for investors.

Meanwhile, this move leaves Alphabet better able to pursue value-added acquisitions while it works to resolve antitrust charges from the European Union. Twitter, EBay, Spotify, and even Tesla become realistic possibilities under this structure. Imaging Elon Musk as CEO of a wholly owned Alphabet subsidiary with responsibility for the further development of autonomous vehicle technology. In the current environment, such moves would have been unthinkable if tied directly to Google’s core search business.

Investors apparently agree with my optimistic take on Alphabet, taking GOOG stock up 5% after hours once the blog post hit. The 2Q15 results, showing new discipline on expense controls and strong growth from the core business, assuaged a number of market concerns. This reorganization could provide the energy to keep the trajectory moving up and to the right.

 

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