Google’s Restructure Perfect For Growth And Clarity

In 2004, Google (GOOG) (GOOGL) founders Larry Page and Sergey Brin wrote a letter to investors telling them what they’re getting themselves into. They wrote that Google was never intended to be a “conventional company” and that investors should expect the company to make “smaller bets in areas that might seem very speculative or even strange when compared to our current businesses.”

For a long time, that wasn’t a problem for shareholders. But recently, Google has seen some declines in its search business. With competitors like Facebook (FB) and the shift toward mobile looming, Google’s main business floundered a bit, leaving shareholders to complain about all the side projects the company was pursuing.

On Monday, Google came up with a solution. On its official blog, Page wrote that Google would be restructuring its businesses under a new company, called Alphabet. In a nutshell, the planned structure mimics the way companies like General Electric and Berkshire Hathaway are organized — a central unit handling company-wide activity and autonomous business units focusing on specific ventures.

Under the new structure, Google will remain the largest entity, covering the search engine, YouTube and Google Maps. All of Google’s other businesses, including Google X, Calico, Nest, Fiber, driverless cars, Google Ventures and Google Capital, will all separate to “make it cleaner and more accountable,” wrote Page. Page also wrote that he would become CEO of Alphabet, with Brin as the company’s president, while current Product Chief would take over as CEO of Google.

Investor reaction

So how to shareholders feel about the change? If anything, the after-hours activity should give you an idea: Google was up 6% overnight. The main reason is because it gives investors more transparency than ever before. For example, they’ll now be able to see the financials for each business segment rather than wondering how they all fit into the big picture.

"They are aware that they've got this hodgepodge of companies," said Roger Kay, an analyst at Endpoint Technologies Associates. "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."

It also helps the company hone its focus on each business. For example, if one unit is doing poorly, it will be a lot easier to dial it down or give it a boost. It also gives Alphabet more leeway in forming new companies or partnerships — simply add them to the holding company. Some analysts have noted that this could be just the beginning of structural changes that provide more clarity. But as long as it makes things easier on shareholders rather than more cumbersome, bring it on.

The new structure also makes it easier for the company to focus on growth. “Those long bets are now baked into the most basic DNA of the company, and Page and Brin have little reason to stop making them,” the Verge’s Russell Brandom writes. So while Pichai can focus on maintaining Google, Page and Brin can now prioritize what they believe to be Google’s initial mission to make the world a better place.