Google Inc announced a major shake-up of its operating structure on Monday, creating a holding company called Alphabet which will contain subsidiaries to separate its core web advertising business from newer ventures like driverless cars.
The move appeared to be an attempt to let the search engine giant focus on its more creative and ambitious projects, while investors cheered the potential for more financial disclosures of its disparate business segments.
"It suggests that in all likelihood, Google is not going to slow the pace of their experimental processes like self driving cars," said Michael Yoshikami, head of Destination Wealth Management which has $1.5 billion US under management.
The surprise news sent shares of Google up as much as seven per cent to $708 in after hours trading.
"They are aware that they've got this hodgepodge of companies. Maybe it's better to sort them out a bit and make it clearer which ones are bringing in the bacon and which ones are science projects and which ones are long term bets," said Roger Kay, an analyst at Endpoint Technologies Associates.
The Mountain View-based company co-founded by Larry Page and Sergey Brin in 1998 has grown to more than 40,000 employees worldwide.
Google's planned structure resembles the way companies like Berkshire Hathaway and General Electric are organized, with a central unit handling corporate-wide activities such as finance and relatively independent business units focused on specific areas.
Traditional business under Google unit
Under the new corporate structure, the Google unit will encompass the core search engine traditionally associated with the company as well Google Maps and YouTube.
The company's new ventures such as Calico, which focuses on longevity, and connected home products maker Nest will be managed separately.
Alphabet Inc will replace Google as the publicly traded entity and all shares of Google will automatically convert into the same number of shares of Alphabet, with all of the same rights.
"This new structure will allow us to keep tremendous focus on the extraordinary opportunities we have inside of Google," said current Google CEO Larry Page in a blogpost.
Analysts also said the new structure could herald a new era of fiscal discipline and transparency in some of its more experimental and opaque business units.
In a SEC filing, Google said the new arrangement will take effect later this year and that it will likely result in two reportable, financial segments.
"For example, if a unit is doing well or badly they can dial it up or down, they can form partnerships or different companies," said Kay, the Endpoint Technologies Associates analyst.
The shuffle also looked to have the markings of Ruth Porat, who joined Google as its chief financial officer in March from Morgan Stanley. In Google's recent quarterly conference call, Porat repeatedly emphasized keeping expenses under control.
Porat will serve as the CFO of both Alphabet and Google.
Page will serve as the CEO of the newly created holding company and Sundar Pichai, a long-time Google executive who most recently served as the company's senior vice president of products, will head Google. The company's current directors will become directors of Alphabet.
Google co-founder Brin will become president of Alphabet, and Eric Schmidt will be executive chairman.
Analysts said the move, which was mainly about transparency and accountability, could be followed by more structural changes in the future.
"This may be step one of several steps," said Morningstar analyst Rick Summer.
Larry Page's full statement:
As Sergey and I wrote in the original founders letter 11 years ago, "Google is not a conventional company. We do not intend to become one." As part of that, we also said that you could expect us to make "smaller bets in areas that might seem very speculative or even strange when compared to our current businesses." From the start, we've always strived to do more, and to do important and meaningful things with the resources we have.
We did a lot of things that seemed crazy at the time. Many of those crazy things now have over a billion users, like Google Maps, YouTube, Chrome, and Android. And we haven't stopped there. We are still trying to do things other people think are crazy but we are super excited about.
We've long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.
Our company is operating well today, but we think we can make it cleaner and more accountable. So we are creating a new company, called Alphabet (http://abc.xyz). I am really excited to be running Alphabet as CEO with help from my capable partner, Sergey, as President.
What is Alphabet? 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. Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed. We will rigorously handle capital allocation and work to make sure each business is executing well. We'll also make sure we have a great CEO for each business, and we'll determine their compensation. In addition, with this new structure we plan to implement segment reporting for our Q4 results, where Google financials will be provided separately than those for the rest of Alphabet businesses as a whole.
This new structure will allow us to keep tremendous focus on the extraordinary opportunities we have inside of Google. A key part of this is Sundar Pichai. Sundar has been saying the things I would have said (and sometimes better!) for quite some time now, and I've been tremendously enjoying our work together. He has really stepped up since October of last year, when he took on product and engineering responsibility for our Internet businesses. Sergey and I have been super excited about his progress and dedication to the company. And it is clear to us and our board that it is time for Sundar to be CEO of Google. I feel very fortunate to have someone as talented as he is to run the slightly slimmed down Google and this frees up time for me to continue to scale our aspirations. I have been spending quite a bit of time with Sundar, helping him and the company in any way I can, and I will of course continue to do that. Google itself is also making all sorts of new products, and I know Sundar will always be focused on innovation -- continuing to stretch boundaries. I know he deeply cares that we can continue to make big strides on our core mission to organize the world's information. Recent launches like Google Photos and Google Now using machine learning are amazing progress. Google also has some services that are run with their own identity, like YouTube. Susan is doing a great job as CEO, running a strong brand and driving incredible growth.
Sergey and I are seriously in the business of starting new things. Alphabet will also include our X lab, which incubates new efforts like Wing, our drone delivery effort. We are also stoked about growing our investment arms, Ventures and Capital, as part of this new structure.
Alphabet Inc. will replace Google Inc. as the publicly-traded entity and all shares of Google will automatically convert into the same number of shares of Alphabet, with all of the same rights. Google will become a wholly-owned subsidiary of Alphabet. Our two classes of shares will continue to trade on Nasdaq as GOOGL and GOOG.
For Sergey and me this is a very exciting new chapter in the life of Google -- the birth of Alphabet. We liked the name Alphabet because it means a collection of letters that represent language, one of humanity's most important innovations, and is the core of how we index with Google search! We also like that it means alpha-bet (Alpha is investment return above benchmark), which we strive for! 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.
What could be better? No wonder we are excited to get to work with everyone in the Alphabet family. Don't worry, we're still getting used to the name too!