18 Aug 2015
London Business School expert warns restructure will create problems
Google’s decision to restructure itself with a holding company, Alphabet, is a risky bet that will create enormous problems for them down the road, a strategy expert from London Business School has warned.
Julian Birkinshaw, Professor of Strategy and Entrepreneurship, London Business School, made the comments following Google’s announcement that it will restructure with a holding company (Alphabet), a number of operating companies with CEOs and segment-level financial reporting, which many investors have applauded.
Writing for Forbes, Professor Birkinshaw says that even with Google’s three-class share structure that allows Larry Page and Sergey Brin to retain voting right control, it is still a PLC and is accountable to its investors.
“The company is not immune from analyst criticism and from shareholder activism, and the creation of Alphabet is testament to this. The proposition on offer with this new structure is that by increasing transparency and accountability, investors will be happier, and the group will ultimately perform better.”
However, this change will actually have the reverse effect, says Professor Birkinshaw.
“What will be the consequence when Alphabet announces its first set of financial results, with this new-found transparency?” Birkinshaw asks. “We already know that more than 90% of Google’s revenues come from paid search and advertising. What we don’t know – but will shortly discover – is how much money Google is pouring into its non-core businesses and just how unprofitable those businesses are. This sounds fine, but investors are notoriously short-sighted.
“Capital markets are rarely supportive of big risky bets,” Professor Birkinshaw further points out. “When Alphabet announces its results, there will be calls for Page and Brin to close down the biggest money-losers, or to spin off the paid search business, so investors can invest in it separately.”
Investors will be asking the question: “Why is Google doing this stuff with my money?” says Professor Birkinshaw. This is one of the dark sides of transparency.
“Investors will struggle to understand Page and Brin’s big ideas, especially while they are still being developed. And they will have no patience for failure.”
Birkinshaw believes Page and Brin are opening up a Pandora’s box of commentary and criticism that they could well do without.
“The only sustainable model for all Google’s really creative business ideas is a Private Equity model, or perhaps a foundation, where they can work on their ‘moonshot’ ventures away from the glare of the public capital markets,” Professor Birkinshaw concludes.