Here’s the multibillion-dollar question of the moment: Does Google’s restructuring signal a huge deal is in the works?
In the days following the announcement that Google will become a subsidiary of a new parent company called Alphabet, many have speculated the move was partly motivated by a desire to make big acquisitions—a la Berkshire Hathaway.
It’s understandable that observers would start dreaming up daring deals. Google is sitting on nearly $70 billion in cash. If it doesn’t find something big to buy, the cries for a dividend or share repurchases will get louder. Exciting for shareholders, but far short of the moonshots we associate with Google.
Now for the bad news, dreamers: This corporate-structure rejiggering does not make a massive acquisition any more likely.
“As a general rule, [the holding-company structure] does not make it more easy” to make large acquisitions, James Van Horne, a professor who’s taught corporate finance at Stanford University since 1965, tells Quartz. He says that while acquiring unrelated companies could be a motivation for forming a holding company (it’s organizationally simpler), there are no clear legal advantages to doing so. “If synergy is involved, one would want that acquisition to be a part of the operating company,” Van Horne says. “If unrelated and a company is a conglomerate, the holding-company structure makes sense.”
The fact is there’s never been anything—corporate structure or otherwise—preventing Google from acquiring companies that didn’t relate to its core advertising business—as it did with Nest, which it paid $3.2 billion for in 2014. That’s because its founders, Larry Page and Sergey Brin, aren’t beholden to anyone but themselves. The two hold most of the voting power through Google’s elaborate tiered-share structure.
As Aswath Damodaran, a professor at New York University’s Stern Business School, puts it: “Google has been structured as a dictatorship.”
This meant Page and Brin “could do whatever the heck they wanted,” says Todd Zenger, a management professor at the University of Utah. “They have incredible autonomy.”
And they’ve had very little appetite for big deals over the years. Since its founding, Google has only done a handful of deals in excess of $1 billion. The biggest—its $12.5 billion acquisition of Motorola Mobility in 2011—was short lived and not exactly a success. Perhaps Page and Brin have a new strategy, but a swing to blockbuster dealmaking would be a very big surprise.
In theory, the new Alphabet structure could make acquisition offers more appealing to potential targets if these companies believe they can operate autonomously. Imagine a Tesla tucked under the Alphabet umbrella, while still under Elon Musk’s authority. (Something like Twitter, on the other hand, would likely belong under Google.)
But Damodaran is skeptical. Given his characterization of Google as a dictatorship—a benevolent one, he clarifies later—he doesn’t think Alphabet companies will be able to truly run independently. (In addition to Google proper, Nest, Google X, Google Fiber, Google Capital, Google Ventures, and biotech firms Calico and Life Sciences will operate as Alphabet subsidiaries.)
“These guys [Page and Brin] are control freaks,” he says. “For real change to happen, those [subsidiaries] have to be given the power to make their own decisions even if Google doesn’t agree with them.” Otherwise, there’s little difference between Google as it stands and Alphabet once the restructuring is complete, he adds.
What about spin-offs? A holding company would make it easier to spin off independent companies, but that’s likely not Google’s intention. Page said restructuring would bring transparency into the company’s businesses, but Alphabet only intends to break out detailed financials for Google; the rest will be reported in aggregate. That’s going to stand in the way of any planned spin-offs as the US Securities and Exchange Commission requires companies to provide “adequate information” about such entities.
“This is a step in the right direction if you’re going to have a spin-off,” says Van Horne. But he expects analysts and activist shareholders to demand more details about the individual businesses.
Then again, such demands might fall on deaf ears. After all, Larry and Sergey do what they want.