On Monday Google announced that it is reorganizing its business and will create a new company called “Alphabet.” The internet businesses that generate most of the current company’s revenue (such as its ubiquitous search engine and YouTube) will be put into a subsidiary called “Google” that will be owned by Alphabet. The current company’s other endeavors (such as its attempts to build self-driving cars and Nest, its internet-connected household products business) will also be subsidiaries owned by Alphabet but will be separate from the subsidiary called Google.
The key to understanding why Google would shuffle its corporate structure is the company’s ownership. Even as it has become one of the world’s largest companies (its market value is currently more than $450 billion), Google’s founders have ensured that they retained control of the company and couldn’t get outvoted by other shareholders. That control has given them more flexibility to invest in longer-term ideas such as the self-driving cars without worrying that disgruntled shareholders would replace them with new executives.
By splitting the core internet business from these longer-term projects, the new company will be providing more information to investors about the financial performance of the core business and how much money is being invested in everything else. By trying to separate investors’ perceptions of how the internet business is performing from how much money is being invested in the longer-term projects, it could also (much like the company’s convoluted ownership structure) give Alphabet’s executives more flexibility to invest in the longer-term projects.
Whether this is good news or bad news for Google’s shareholders depends on how much confidence they have in the company’s executives. For those who believe that Google’s ownership structure gives its executives the freedom to make necessary long-term investments that will eventually pay off handsomely, the change should be cheered. Those who believe that Google’s ownership structure is a license to waste shareholders’ money on executives’ pet projects should have a less favorable assessment.