Alphabet (GOOGL) (GOOG) is a one-of-a-kind firm, whose foundations have been laid not on an invention or an idea but a strategy. A corporate restructuring strategy, where an umbrella business model accommodates the mother company and its subordinate firms. The holding company Alphabet was formed with an intent to serve as a parent company to Google and its subsidiaries. These subsidiaries were envisioned to work as an independent entity, generating its own revenue without impacting its peers under the umbrella.
It all started when the restructuring of Google became inevitable. Founded in 1998, the search engine giant grew favorably in the span of 15 years. The business grew so well that it dived into multiple co-centric acquisitions. Google’s first decade of 2000 saw an exponential growth both organically and through these deals. The organic growth came from the search engine and advertisements. While the bought firms had their own line of business, they added a great deal of value to Google’s primary business.
The idea of restructuring
Google’s business model was indeed promising. It revolutionized the world search engine platform. There were so many areas to explore that Google absorbed firms like Android and YouTube, which added value to the company. Google in the later years of 2000 bought some major companies and bought them on board. However, this expansion through acquisitions brought some uncertainties along with it. There were business segments that did grow but had no orientation to a vision it was supposed to take in the future.
The expansion was so arbitrary that it became difficult for the operations to oversee the diverse lines of business. Moreover, when the heads of the operations were streamlining the unconventional growth, co-founders Larry Page and Sergey Brin started the change of guard. They shifted the then CEO Eric Schmidt to the role of executive chairman. Then Page himself took the CEO role. All these actions looked unnecessary from an investor’s point of view. They saw Google as a maestro in browsing platforms and were expecting founders to further capitalize in the same sector.
Surprisingly, many things the founders did put investors on the wrong foot.
- Page took over the reign as CEO.
- The founders launched their own moon-shots projects (research and development) platform.
- They invested in an unrealistic business that was difficult to value.
- They showed a loose sense of accountability when it came to regulations and anti-trust issues.
All these in a sense led to the need for restructuring Google.
The G of Google remerges with the A of Alphabet
Page saw the problem and understood the expectations of investors. He wanted to explore and invest in new territories. But it was obviously not possible at the cost of investors’ money. The stockholders expected Google to spend all its profits on fast-growing opportunities like AI (Artificial Intelligence).
The cofounders were in course with the stockholders but didn’t want to confine themselves to Google’s core business. Hence, they came up with a gutsy move to restructure Google. On October 2, 2015, Alphabet was formed.
The whole process of restructuring Google was a risky experiment. The adopted umbrella business model in Alphabet was not similar to the general rule, making the restructuring a big corporate gamble. Both investors and the market shared a mixed emotion on the unconventional restructuring of Google.
The co-founders restructure Google for the better
The co-founders did try explaining the need and intent behind the whole transformation. However, the letters explaining their thoughts were, in many ways, a good read but far from reality. Despite all the criticism, the co-founders restructured Google and embarked on a quest to find its right fit.
Cut to five years from 2015. Now, Alphabet understands the operational intricacies of its umbrella model. The peer firms under the umbrella are synced as supportive wings to the holding company. Today, when we look at Alphabet as a whole entity, the results are quite interesting. The revenue numbers tell us a positive story.
Though there were instances that concluded the gutsy corporate experiment went for a toss, Alphabet grew, resolving its structural offsets. An April 2016 Wired article talked about the early problems with Alphabet. However, by Q3 2019 earnings, the parent company revenue surged 20% YoY (year-over-year) to $40.5 billion.
Alphabet in the stock market
Today, Alphabet shares trade on Nasdaq under two tickers Alphabet Inc Class A (GOOGL) and Alphabet Inc Class C (GOOG). They both rose 30% YTD (year-to-date). This is in line with the S&P 500 Index, which rose 29% YTD. Alphabet is hovering around a $940 billion market cap. It remains to be seen if it can catch up with other tech giants Apple, Microsoft, and Amazon to hit the $1 trillion market cap in 2020.