What is behind Google's name change to Alphabet and is there any upside from it?
06:00 PM 08/11/2015
Aug 11, 2015 Google announced that it will reorganize itself by creating a new holding company called Alphabet, leaving all traditional businesses like search, Youtube to one subsidiary and organizing all new projects as separate subsidiaries.
What does that mean? In short: it's a transformation from visionary to professional approach to management.
What is behind this move?
1) Search traveled from a growing business to a mature business which should be managed in a cost-efficient manner to keep attractiveness for investors.
Investors were calm looking how Google spends money on projects with unclear returns while it was a fast growing company. They even didn't know how much money was made in the core business and how much money was spend on each of the new projects.
2) Sergey and Larry want to focus on new businesses and give both day to day and strategic decision making to a professional management team
To implement 1) they
1.1) Hired a new CFO in March 2015 directly from Morgan Stanley. The incoming CFO is Ruth Porat, who occupied that role at Morgan Stanley, where she has worked since 1987.
Porat has a long and storied history, including leading financing rounds on a number of tech companies including Amazon, eBay and Netscape, and she was previously co-head of Technology Investment Banking at Morgan Stanley. She’ll join the search giant on May 26, reporting directly to Google CEO Larry Page.
After Ruth conducted the first earnings call with investors on July 16, 2015, and talked with investors their language including cost discussion rather than "save the world" language. Google shares jumped nearly 20 percent in just a few days.
1.2) Google's core business CEO will be Sundar Pichai.
Originally from Tamil Nadu, one of India's 29 states, Pichai studied at the Indian Institute of Technology Kharagpur, where he received a Bachelor of Technology.
He then received a M.S. from Stanford and obtained an MBA from Wharton School at the University of Pennsylvania. At Wharton, Pichai was honored as a Siebel Scholar and a Palmer Scholar.
Is there any upside for investors?
A) Look at the backgrounds of there two key people. Of course they have high quality background, but which is more important they are quantitatively oriented.
That means now financial optimization will start, fat will be gradually reduced and Google has a lot of it. We are not talking about cost cutting, we are talking about making decisions based on NPV calculations rather than developer's feelings.
We believe this will expand Google's core business margins in the years to come.
B) Alphabet will separate budgets for core and other businesses. Now it will be pretty clear internally how much money is spent on new projects and these money will become limited in the form of allocated budgets rather than being taken from almost unlimited profit pool of the core business. Which will at least indirectly increase financial efficiency of the new projects and will also benefit the stock.
