Estimated reading time: 3 minutes
Yesterday, Google announced that they will be forming a new holding company. Alphabet will be a sort of umbrella corporation (hehe) containing all the various branches, organizations and companies belonging to Google, including the search engine (Google Inc.). This has got a lot of people asking questions, from “What does this mean to me?” to “Why would a company as large as Google bother forming a holding company now, after all these years?”
Well the first question’s easy. Unless you’re an investor, or a competitor of the tech giant, it doesn’t really affect you. And if you are an investor you should already know what a holding company is and what it does.
So this one’s for those wondering why this is a big move but need a little Business 101 first.
WHAT’S A HOLDING COMPANY?
Investopedia defines a holding company as:
A parent corporation, limited liability company or limited partnership that owns enough voting stock in another company to control its policies and management. A holding company exists for the sole purpose of controlling another company, which might also be a corporation, limited partnership or limited liability company, rather than for the purpose of producing its own goods or services.
In other words, it’s an umbrella company under which one or more companies exist. “Alphabet is mostly a collection of companies,” said Larry in the official blog post release linked earlier. Google’s current situation is Google Inc. (the search engine tech company) owns all the different companies and organizations. With Alphabet, the holding company will now own and control Google Inc. and all other related companies, such as Nest (a home automation company) and Project Loon (balloon based internet). It will also hold all the research and development companies currently owned by Google (such as Calico – a company focusing on life longevity). This takes away the control of all other companies from Google Inc. and puts it under Alphabet.
Larry and Sergey, co-founders of Google, will now run Alphabet, and Sundar Pichai will take on the role of Google Inc. CEO.
The answer to “Why?” is multi-faceted but not hard to understand. I would bet a lot of thought (and lawyer discussions) went into deciding whether or not this was the right path for Google but, ultimately, the advantages seem obvious enough:
1. Money and capital allocation. Cash now goes directly to Alphabet instead of Google, providing Larry and Sergey with an easier way to re-allocate that money. Previously, they were operators of Google. Now they’re money managers. Shareholders of Google felt they were right to question the co-founders’ decisions to invest in projects like Life Sciences (glucose-sensing contact lenses), but shareholders of Alphabet are investing in Larry and Sergey’s ability to manage money not operate a company, shifting investors’ focus from “Tech Company” to “Collection of Tech Companies”.
2. Liability and risk mitigation. As it is now, Google Inc. owns a lot of moonshot companies and projects (such as Google X). What this means is that if any of these crazy projects were to sustain heavy losses, Google Inc. would bear the brunt and liabilities. With Alphabet, it’s the holding company that handles that setback, making Google Inc. as a search engine company a much more predictable and stable business (including revenues). A project gone wrong should not affect another project.
3. Brand safety. Similar to the second point, experimentation will no longer affect Google, but Alphabet. The Google brand will belong strictly to the search engine as a child of Alphabet. Brand issues and failed projects and companies won’t affect the Google brand, but the Alphabet one. The creation of a holding company also frees Larry and Sergey to take on more left-field experiments that have nothing to do with the search engine’s mission statement.
4. Autonomy. Google Inc. currently manages all the different companies it bought over the years. This binds the CEO of Google Search into managing completely unrelated projects such as the aforementioned Google X Labs. With Alphabet, management falls into the hands of the holding company, freeing each company’s CEO to handle their own company.
It’s a very interesting move by Larry and Sergey, to say the least. Both GOOGL and GOOG stock prices have shot up immediately following the announcement so investors seem to believe the change is for the best. We’ll just have to wait and see.
Thank you for reading. Take care and have an awesome day :)