No, Google’s new “Alphabet” structure is really nothing like Berkshire Hathaway

Inspiration, only in part.
Inspiration, only in part.
Image: Reuters/Lane Hickenbottom
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This post has been corrected.

When Google announced the formation of its new holding company Alphabet this week, an immediate and common reaction was to portray it as an attempt to become a new version of Warren Buffett’s Berkshire Hathaway conglomerate. While cofounder Larry Page has been known to single out the Oracle of Omaha as a model for great management, it’s not a terribly apt comparison. Alphabet is very much its own thing.

Google was already a conglomerate of sorts, but it was—and is likely to remain—a very un-Berkshire version. With the help of Larry Cunningham, a George Washington University law professor, author, and expert on Berkshire Hathaway, we broke down the challenges Alphabet and its CEO faces in emulating the Buffett model.

The similarities

There are a few similarities, at least compared to most other companies.

Both firms have low debt, and generate vast amounts of cash. Neither generally pay a dividend or buy back shares, though Buffett has made exceptions on the buy back front. Both have dual share classes that ensure the founders have control. All that financial flexibility and autonomy positions both to make big, long-term bets.

The management structure and culture is pretty clearly inspired by Buffett. Page has reportedly (paywall) named Berkshire as a model. Management autonomy for individual businesses is a Buffett mantra, and Alphabet will put individual CEOs in charge of different businesses reporting only to Page.

The differences

But as much as Alphabet takes inspiration on that front, it misses a lot of other lessons from Berkshire. The most important difference is that while Alphabet’s businesses operate independently, they’re not at all financially independent. They depend on the performance of the core Google ad business, and that looks unlikely to change any time soon.

In his letter, Page pledges to “rigorously handle capital allocation and work to make sure each business is executing well.” That would be very Buffett-like, but the types of businesses Alphabet has under its umbrella definitely aren’t. They’re speculative money losers with no clear future, as opposed to Berkshire’s signature cash generators.

As Cunningham puts it, it’s a case of “stodgy financial-industrial” at Berkshire versus “dynamic technology” at Google. The former is much better at throwing off profits, and the latter is much more error prone in ways that are somewhat beyond Google management’s control.

Unlike Berkshire, Google doesn’t have clearly and publicly articulated criteria for acquisitions, and little experience (and possibly interest) in buying and integrating big, mature, money-making businesses. One of Berkshire’s major advantages is that it manages to pay a lower price for businesses as it offers prestige, a long-term home, and a history of giving management autonomy. Alphabet doesn’t yet offer that.

Berkshire headquarters and subsidiaries are also marked by an obsession with frugality, Cunningham notes, while Google is known for its free cafeteria and extravagantly designed headquarters. (But there’s hope its new CFO is bringing some discipline on the cost front.)

So while Berkshire is definitely the management model for Alphabet, the fundamentals of the underlying businesses remain worlds apart.

Correction (August 14): A previous version of this post said that Berkshire Hathaway has never bought back shares. It did so in 2011. Thanks to Quartz reader Paul Cocker.