Search giant Google surprised investors earlier this week by announcing a major corporate restructuring. A parent holding company, Alphabet, will be created and all other businesses will reside under its multicolored umbrella. This includes Google, naturally, which will be the largest subsidiary. Investors cheered the news, sending shares up by 4% the following day.
The hope is that the new corporate structure would shed some light on the company's spending on side projects, bringing a much-needed level of transparency to Google. Are investors excited to see the billions that Google invests into moon shots? Exactly how transparent will Google be?
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More transparency is never a bad thingEven without knowing precisely how much detail Google will begin disclosing, more transparency is always a good thing for investors. Within Google, there are a handful of highly sought-after financial mysteries that investors have longed for, such as Android-related revenue or YouTube revenue.
More importantly, do these major operations turn a profit? In his last conference call in April, outgoing CFO Patrick Pichette implied that YouTube wasn't profitable yet, saying, "If you just want to make YouTube profitable to more users, very easy, right? You put on the brakes on growth, and then it just turns into a profitable business."
Over the years, there have been plenty of reports suggesting various figures, but never anything concrete. Hopefully, Google changes that. It would also be helpful if it gives better insight into its margin profile, showing which businesses are most profitable so that investors can better assess future risks as tech trends change.
Moon shots are expensiveIndividually, it's unlikely that Google spends a whole lot on specific moon shot projects. That's sort of the idea, anyway, since the company is looking for revolutionary ideas that could be the next big thing. But combined, it's very possible that Google is losing quite a bit of money in this search. Morgan Stanley analyst Brian Nowak estimates that Google could be losing $8 billion to $9 billion per year on investment projects.
This is especially true as Google Ventures and Google Capital, both of the company's investment arms, continue to grow. Page says he's particularly excited about growing Ventures and Capital under Alphabet. When it comes to early-stage venture capital investing, excessive financial risk and losses are often par for the course. But sometimes they pay off exponentially.
In fact, you might be surprised that you already know some of the companies that Google has helped back through Ventures and Capital, many of which have since gone public or been acquired. Familiar names like LendingClub, Glassdoor, Credit Karma, Slack, Pocket, Uber, and Periscope, among many others, have all had help from Google.
Who needs dividends?Simply put, the restructuring is all about two things: autonomy and focus. The sheer number of side projects at Google was ballooning and in order for each to have a cohesive vision with dedicated budgets, Google needed to restructure. In the announcement, Page assured investors that he and Sergey Brin will "rigorously handle capital allocation" and choose CEOs for each business.
Besides, keep in mind that due to Google's triple-class voting structure, public investors have effectively no control over how Page, Brin, and Eric Schmidt decide to invest Google's billions in the bank. At least this way, they'll have a better idea of where all that money is going.
New CFO Ruth Porat pleased investors last quarter when she promised greater cost controls, while hinting that a capital return program could be on the horizon. Even if no capital return program materializes under Alphabet, greater financial discipline with spending along with improved transparency are two very good reasons why investors should be saying their A-B-Cs.
The article Will Google's Alphabet Restructuring Uncover Billions in Side Spending? originally appeared on Fool.com.
Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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