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Alphabet Inc. Restructuring Decision

Manisha Thapa

Westcliff University

BUS 525 Strategic Management in a Globalized Economy

Mrs. Ajanta Das Dutta

December 16, 2020

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Google Event in 2015

Google, a multinational company that is well known for internet-based inventions

such as web-based search engine, Cloud computing, software applications, mobile operating,

hardware products, and enterprise solutions. It was established in 1998 by Larry Page and

Sergey Brin when they were Ph.D. students at Stanford University. Besides the internet-based

inventions, google also has hosting services such as mapping, emails, social networking

space, payment gateway services, and many more. Innovation, new technologies are the

major factors that have positioned google strongly in the global market. Google is considered

to be one of the big five companies in the US. The company’s rapid growth after the

company triggered a chain of products, acquisition, and partnership beyond Google's core

search engine.

Google revealed its intention to reorganize the various interests in August 2015 as a

conglomerate called Alphabet Inc. Google is the leading subsidiary of Alphabet. It

distinguishes the non-core business of Google Inc. from the core business of Google, such as

internet operations such as YouTube, Google search engine, and Android, such as life science

research, investment division, internet access, and self-driving vehicles. Companies were then

reorganized into two parts, i.e. Google and other bets (other 10 firms). Under the current

system, several companies like Google developed and operated separately as Alphabet's

subsidiaries. Google's restructuring aimed to show its investors a clearer understanding of the

profit and loss of the business by splitting the most profitable project of the company into

separate organizations, i.e. google fiber (Bettie, 2020, May 19).

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Impact of Reorganization on Stock price

The reorganization decision by Google made Alphabet Inc. a separate entity while the

parent company split the company into two i.e. Google and other bets. The industry analyst

claims that Google's reorganization decision was due to stagnate share price and to try to

appease investors. Also, their intention to restructure Google under the new holding company

was to preserve Google's core brand and boost the operating efficiency of independent

companies. Likewise, also to provide proper supervision as well as assist in bringing financial

transparency of the company. Few of the analyst also states that restructuring has helped

google to be more competitive as the restructuring shows the clear picture of stock price to

the investors. Likewise, transparency in stock price would help the investors to make

investment decisions. Whereas Alphabet Inc. became more disciplined financially after the

reorganization. Non-core firms, however, suffered due to the increasing pressure to control

expenses from revenue generate (Bettie, 2020, May 19).

The increasing stock price of Google is listed in Nasdaq as GOOGL and GOOG for

trading. When the restructuring was announced, common stock is increased by 6 % while

more than $28 billion market value is created. After the restructuring of Google, Alphabet

became a publicly-traded corporation and all the share of Google is transferred to Alphabet.

The below table shows the stock price

Year Stock Price

2019 1337.02
2018 1135.61
2017 1046.40
2016 771.82
2015 758.88
2014 524.96
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2013 558.26
2012 352.37
2011 321.74
2010 295.88
Source: https://finance.yahoo.com/quote/GOOG/history?

Table 1: The historical Data of GOOG

From the above table, it can be observed that the share price of the company is

increasing since 2015 as a result of restructuring. Before 2014 the stock price of the company

is increasing but at a decreasing rate. This is maybe because the investors were worried about

the return as the company was too complicated and risky. Because the company was involved

in various projects. Whereas investors were also concerned about the google stock price and a

result share price of the company remain stagnant. Hence, the reorganization was a result of

stagnating share price and also to appease the investors. The restructuring of the company

brings transparency in operation and improves operational efficiency contributing to greater

profitability. Thus, the reorganization was the action taken due to the stagnant share price.

Google's stock price in the current market is almost $ 1800 which means the growth of the

company in terms of market valuation.

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Effect of Google’s Decision to Restructure

By splitting Google and other bets in 2015, Alphabet Inc. agreed to restructure the

company. Bet faced financial strain after the restructuring as it was plagued with losses of

millions and billions of dollars per year. The Google strategy to reorganize the business

worsened and 'other bets' have to face a loss of $1.1 billion in the fourth quarter of 2016 and

$3.6 billion in the fiscal year of 2016 as a result. However, the move for google helped it

while the same decision for other bets went worse. Thus, the reorganizing decisions brought

about the company's financial crisis for other bets (Reddy, 2020).

The restructuring decision of the company helps the organization be to be

competitive, stronger, and profitable. Google is a diversified venture and generates revenue

from core businesses such as Google Search Engine and Online Advertisement. After

restructuring google, it was able to fully focused on its core business and strengthen its

financial position. The market capitalization of the company increased to 200 million dollars

which are almost double the company value. During the fourth quarter of 2015, the earnings

from google were $ 21.3 billion that 18% year by year. Similarly, the revenue raises to 74.5

billion dollars at the end of the fiscal year and the net profit was 23.4 billion dollars.

Likewise, other bets on the other side also realize the revenue of $448 million. After the

statement release in the first quarter of 2016, Alphabets became the most valuable company

in the world with the share price up by 8%. Alphabet Inc. became the strong competitor of

apple corporations. Through the online advertisement business, Alphabet was excelling the

business flourishing its sales. The market value of the company went to $531 billion.

Likewise, in 2015, Alphabet has a growth rate of 20% (Bradlow, 2015).

Similarly, the restructuring has an impact on a financial statement as earlier all the

income and expenses of all the business operation were shown in the same statement because

of which investors were not able to analyze the profitability. However, after restructuring the
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financial statement is transparent and this has helped the investors to make decisions.

Likewise, the company has become more competitive and transparent whereas the company

market valuation is also gradually increased (Moghadasi, 2019).

Expansion of Google Inc.

Google's decision to restructure itself under a new holding company named Alphabet

was to protect the core brand while giving independence for its riskier investments and to

bring transparency to that investment. As the subsidiary of Alphabet Inc. Google will retain

internet products including SEO, YouTube, and Android. The restructuring decision of

Google was a smart move because expanding the business in various areas will result in

profitability. The restructuring and expansion of business brought many uncertainties and

challenges to non-core whereas separation of core business from non-core business helps to

reduce the obstacles business has to encounter when working together (Hitt, Ireland &

Hoskisson, 2019).

Further, the decision helps each business to independently operate its function without

interference. As the segmentation of Google and bets separate them in terms of liability,

profit, and accountability. For instance, Google is now fully focused on its core business like

SEO, YouTube, and Android while it doesn't have any burden of non-core business.

Similarly, the company has the sole authority to decide without any interference.
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The economic ground of profitability

Yes, the decision of google to restructure was a good move because diversifying the

business over many areas helps businesses to diversify risk as earlier all the business

operations were related to each other. So, any impact on any area might affect overall

operation. A single loss of the company will affect all the business if the risk was not

distributed to several sectors. However, separating the core business and non-core business

has helped the business to fully focused on that specific area that has the scope of more

revenue generations. Also, the business operations are more independent than earlier as the

decision can be made without interference. Similarly, restructuring of the company has made

the company more competitive and stronger (Kennedy, 2019, October 25).
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Conclusion

This restructuring intension of google was the response to stagnant share price and

investors' unease. Through restructuring, Google could focus on its core business so its

financial position will strengthen in the market. Further, it would encourage Google to set off

and become a massive corporation of technology (Lowitt, 2015). Similarly, restructuring will

allow each subsidiary company would operate in a separate industry under the Alphabet

holding company and produces various products. The restructuring decision of google is a

smart move as google has diversified the risk through dividing core and non-core business. It

will also allow Google to be able to disclose sales growth from its many subsidiaries. To have

more financial transparency, the Alphabet holding company will split out Google's financial

reports. Thus, the restructuring decision of google has helped the company to improve its

competitiveness in the market bringing transparency in the financial statement.

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Reference

Bettie, A. (2020, May 19). The Story Behind Google's Success. Retrieved from Investopedia:

https://www.investopedia.com/articles/personal-finance/042415/story-behind-googles-

success.asp

Bradlow, E. (2015). What’s Behind Google’s Alphabet Restructuring? Retrieved from:

https://knowledge.wharton.upenn.edu/article/googles-alphabet-reorg-can-the-whole-live-

up-to-one-of-its-parts/

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2019). Strategic Management Competitiveness

and Globalization. Boston.

Kennedy, J. (2019, October 25). Buffett's Moat: Google's Competitive Advantage. Retrieved from

Investopedia: https://www.investopedia.com/articles/insights/051316/buffetts-moat-how-

sustainable-googles-competitive-advantage-googl.asp

Lowitt, E. (2015, August 18). The Volatility Behind Google’s Alphabet. Retrieved from:

https://magazine.wharton.upenn.edu/digital/volatility-behind-google-alphabet/

Reddy, T. (2020, July 25). What Are the Secrets Behind Google’s Success Story? Retrieved

from: https://www.systutorials.com/what-are-the-secrets-behind-googles-success-story/

Moghadasi, M. (2019). Corporate strategy analysis: A case study of Alphabet Inc.