C is for CEOs all the way down! By setting up Alphabet as a holding company, a bit like Berkshire Hathaway, Larry can hand out many more CEO titles than he was ever able to before. Why do Silicon Valley senior management types keep on working when they already have more money than God? In many cases it’s because they want to be a tech-company CEO. Larry is now able to promise that job to lots of people, which is fantastic for talent retention. (It’s not just Alphabet’s constituent companies which will have CEOs. Even within the Google subsidiary it’s clear that Susan Wojcicki will remain the CEO of YouTube, which means that she’ll be a CEO reporting to a CEO reporting to a CEO.)
D is for debt service. Google has a modest amount of debt – about $8 billion – which is incredibly low for a mature company of its size. At some point, much like Apple, it’s likely to start levering up, issuing more debt and buying back its own stock. But lenders don’t want to lend to a company in the business of crazy moon-shots like self-driving cars, because those businesses don’t make money, and also because they come with massive contingent liabilities. (Just imagine the possible class-action suits if the cars get hacked and start killing people.) So there’s now a borrowing vehicle – the Google subsidiary – which is effectively insulated from the other subsidiaries, and which will therefore be able to borrow at a lower rate than the parent company could.
Felix Salmon
Late last year, the European parliament passed a motion to split up Google into separate companies as part of an antitrust investigation; apparently someone high-up at Google took them very seriously.
I’m by no means an expert in the US tax system, but I suspect the new structure could also serve as a method to shuffle profits around and reduce taxation, both in the US and abroad. One more good reason from analyst Jan Dawson:
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). By contrast, it will finally become clear quite how large and unprofitable all the non-core initiatives at Google are, which might well increase pressure from shareholders to exit some of those businesses. I suspect that the positive reaction in the stock market to today’s announcement is a sign that Larry Page and others have signaled to major shareholders that something like this would be happening.
Jan Dawson
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