I was pretty surprised to see a news story like this… Google has decided to restructure its company and as a result have created a parent company called Alphabet.
According to Larry Page of Google, Alphabet is:
…mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead. What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose-sensing contact lens), and Calico (focused on longevity). Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related.
The reason for the restructuring of Google is to make it leaner, cleaner, and more accountable. Also, from a branding perspective, it makes sense. Google is involved in a lot of different industries, from A to Z. What really surprised me with all this wasn’t the company name – it was the domain extension they chose to build on top of. They have decided to go with ABC.XYZ. I know it’s not April 1st, so it doesn’t seem to be a joke. I’m still not crazy about .XYZ as a domain extension, but this news can only mean a big boost for the registry.
According to a post on Quora by Anup Gosavi, here is why Google formed Alphabet:
Alphabet Inc has a lot of parallels with how Berkshire Hathaway is structured and just like Warren Buffet, we now have to think of Larry and Sergey as investors, not entrepreneurs per se. Looking at them in this new light gives some ideas of why this was done.
1. Freedom of capital allotment: Larry and Sergey now act as money managers and have larger freedom to assign substantial capital to any business they choose. Under Google, they would be subject to shareholder questions like“Why invest in Calico (a life longevity company) when it has no demonstrable impact on ad revenues?” or “Is Project Loon (balloon based internet) really strategic to Google?” As shareholders of Alphabet, you are trusting their judgment as money managers and not as operators of any particular company.
2. Taxation benefits: Under the new structure, Alphabet Inc. does not engage in any business operation, which enables the holding company to reduce the responsibility of owning a business. Alphabet Inc has no manufacturing, no products and no services. This allows it to maximize the profits and minimize taxation liability because the dividends it gets from subsidiaries are not taxed (if ownership >80%).
3. Risk mitigation: New structure means that any individual company does not bear liabilities of other companies. This means Google Inc does not bear any liability for potential moonshot projects like Google X that might have substantial losses. Google Inc., becomes a predictable business with predicable growth/ revenues.
4. Google Inc escapes quarterly scrutiny: Alphabet might not choose to declare the P&L accounts for Google Inc., in depth.