The Google founders, Larry Page and Sergey Brin, set the bar quite high for new ventures or "moonshots," as they choose to call their big ideas, from driverless cars to finding the elixir of life. So, it was a bit disappointing to learn that the new Google parent company is to be called "Alphabet," a somewhat lame conflation of the investor jargon for high returns and the idea of taking a gamble.
As a namesake, "betting on alpha" may prove to be a little misleading because the new corporate structure, in which the Alphabet holding company owns the group's businesses, including Google, YouTube and a separate division that will house the moonshots, looks like a very old-fashioned conglomerate. The "c" word does not appear anywhere in Mr. Page's announcement of the new vehicle, but it didn't take long for financial analysts and media to so name the holding-company structure and it caused some bemused disquiet.
One analyst asked whether Google was about to become the "Berkshire Hathaway of the Internet." It's a bit of a back-handed compliment because although the reputation of Berkshire's chief executive Warren Buffett is almost unassailable, few Google investors bought their stock on the assumption that Google would become a ragbag of businesses – from Internet search to car insurance – where the game is not innovation or "moonshots" but raising asset value per share.
The point about conglomerates is that for decades they have been in investment terms, almost a dirty word. They were fashionable industrial business structures from the 1960s until the mid-1980s. It was then thought better to own a range of businesses in different sectors, say car parts, textiles and industrial chemicals, because the effect of different business cycles and risk factors would average out, offering the investor an overall smoother return. The fashion turned, in part because the market became suspicious of acquisitive conglomerates that often used their high-priced stock to buy underperforming businesses, with little long-term value potential.
More important, the markets tended to value conglomerates at less than their book value, seeing the holding company not as a value creator but as a cost burden riding on the back of a bundle of distinct and unconnected businesses. It is an issue that forced the breakup of ITT and has plagued investor perception of GE, one of the United States' leading conglomerates, which owns businesses that range from jet engines to locomotives and fibre optics to fridges as well as a big stake in NBC, the broadcaster. In Britain, the bell began to toll for the conglomerate idea as early as 1987, when Saatchi & Saatchi, an ad agency, was found to be plotting a takeover of Midland Bank.
Yet, some believe conglomerates may be about to find a new lease of life. Even as Mr. Page and Mr. Brin were learning their Alphabet in California, over in Omaha, Neb., Mr. Buffett was plotting the $32-billion (U.S.) takeover of Precision Castparts, a vast aerospace-components business. The scale of Berkshire's industrial holdings now make Mr. Buffett look less like a canny stock picker and more like a Jack Welch, the former chief executive officer of GE.
We don't know where the Google founders want to take Alphabet. The company is even more reluctant to talk about its projects than it is about the details of its operations. The market chose to celebrate the news of the new corporate structure, boosting the stock price by some 10 per cent, but one suspects that the initial enthusiasm, which has partly abated, was due to false hopes that Google's restructuring would lead to a big dividend payout or divestment.
No such luck for short-term investors. The Google bosses have never shown any willingness to reward the stockholders with cash. Instead, they are ploughing it into the business, investing more and more revenue into R&D (at $10-billion, it reached 15 per cent in 2014) and they say the trend will continue.
That would be fine for investors if they knew how the expanding R&D budget was expected to generate long-term profits in the new businesses. The new structure, which will separate the ad revenue generating Google, YouTube and Chrome businesses with the moonshot businesses, may shine a financial spotlight on the cash-absorption of the moonshots, which are at best regarded as early-stage venture capital. Yet, these businesses are not Internet startups but biotech and engineering projects, a league away from Google's established expertise. While it must be true that Mr. Brin and Mr. Page can critically monitor the performance of Google's new hands-on CEO Sundar Pichai and keep him on course, can we be so sure that financial performance will be at the centre of Calico, the biotech business, as it ramps up spending?
Of course, conglomerates are meant to be diversified. That was the original idea. But the purpose of diversification in the old generation of conglomerates was to reduce risk, not to do moonshots. Conglomerate businesses and their bosses lived and died according to financial targets for profit and cash flow, all monitored centrally. We can see Mr. Buffett in that mould, but is that how Alphabet is to be run?
The world needs investors in new ideas and how best these ventures should be housed is an open question. There must be some suspicion that the reason for the new corporate structure at Google has as much to do with the founders' desire to focus time on their new bright ideas. If that is true, then what Google needs is to demerge. Not a new Alphabet so much as a separate language altogether.
Carl Mortished is a Canadian financial journalist and freelance consultant based in Britain.
Carl Mortished