Wall Street's more than happy with Google's restructuring move.
Google shares, or Alphabet shares as they should now be known, opened more than five per cent up continuing the trend in after-hours trading following Larry Page's blog post revealing the new company vision.
Investors are likely pleased that the move brings more transparency to the business' finances, with clearer figures for how its experimental projects are performing.
When Amazon broke out AWS in its financial reporting recently, it took a small but rapidly growing part of the business that was buried in the overall financials and allowed it to shine in its own right, rather eclipsing the core business in the process. Google has to some extent the opposite problem: its core business is massively profitable, but it has a growing number of non-core businesses which are masking its true performance. By breaking out the core Google business and the rest in its financial reporting, Google allows the core business to shine (I’d expect that core business to have better profitability and potentially growth numbers than Google as a company reports currently).
However, he warned this may increase the pressure on co-founders Sergey Brin and Larry Page to make these assets perform or exit them, because "it will finally become clear quite how large and unprofitable all the non-core initiatives at Google are".
These include areas such as robotics, after it bought Boston Dynamics in 2013, and artificial intelligence after it bought UK-based startup Deep Mind last year.
In his note, Page outlined the pair's ambitions for the company take a long term view. He said:
I should add that we are not intending for this to be a big consumer brand with related products - the whole point is that Alphabet companies should have independence and develop their own brands. We are excited about…
- Getting more ambitious things done.
- Taking the long-term view.
- Empowering great entrepreneurs and companies to flourish.
- Investing at the scale of the opportunities and resources we see.
- Improving the transparency and oversight of what we’re doing.
- Making Google even better through greater focus.
- And hopefully...as a result of all this, improving the lives of as many people as we can.
Warwick Business School professor Aleksi Aaltonen said: "The new structure is expected to increase the transparency of company operations, which allows investors to excerpt more influence on the company direction. Whether the reorganisation will change the basic problem Google is facing is another matter."
Innumerable acquisition made by the company over the years and its bold ventures to new industries have so far failed to create commercial success at the scale of its search advertising business. Google is commercially still a one-trick pony, whereas, for instance, Apple has brought iPod, iPhone and iPad to the market since Google launched its search engine.
The long-term view may not be one shared by investors, however, and raises the prospect of selling off assets that are unprofitable.
The holding company structure may help Google to create more successful products. This can happen, for instance, if increased investor pressure imposes a healthy short-term perspective to product development or by simply allowing separate business units to operate more independently towards commercial success. At the same time, the holding company structure raises the question would different businesses be better off as independent companies. The new structure makes it easier both to sell off assets that won’t start making profit in a foreseeable future and to spin-off ventures that don’t belong to the family.