Google’s Alphabet: Creating the tech version of Warren Buffett’s Berkshire


In this child creating a parent scenario, Google itself – the company’s cash cow with search, mail, advertising, Android, Youtube and maps under its belt – will be the jewel in the crown. Products and ideas under development and those planned for the future will be in the holding company Alphabet, and be Google’s younger siblings with their own growth and funding options. These include life sciences company Calico, Sidewalk Labs, which is about improving city life, Google Ventures, which supports startups, Nest Labs, a home automation company, and Google X, which works on innovations like Google Glass and self-driving cars.

In doing so, Google’s bosses are defining innovation and blue skies thinking as their core competence, not search or mobile operating systems. They are freeing all their past, present and future creations to chart their own route to success. The parent company Alphabet will focus on capital allocation between its various companies, injecting more into companies that show promise, and yanking funding from no-hopers. The funds will come from the profits of Google that are remitted (or advanced) to shareholders, apart from new investors in the holding company itself and in the other companies.

To be sure, Alphabet will be a holding company with two key differences with Buffett’s Berkshire: Buffett buys shares in good businesses (like Coca-Cola) and also entire businesses based on the predictability of their cash flows; Alphabet will invest in projects and companies that are all about future potential, not current cash flows. Secondly, unlike Buffett, the companies may be separately listed or funded by outside capital, though Google may not need to raise money too soon, given that the search company is throwing up lots of cash.

Where Alphabet will resemble Berkshire is in three areas: bringing focus to each business by giving it its own separate leadership and corporate structure and funding, and allocating capital between businesses and projects. Also, given that Google itself hasn’t paid a dividend despite making huge profits, both believe in compounding profits within the company through investments.

The differences between Berkshire Hathaway and Alphabet essentially arise from the areas they operate in. Tech being a risky business with possibilities of sudden obsolescence, Alphabet’s structure is about taking risks and insulating the rest from the risks of one business going bust. Berkshire Hathaway’s approach is the exact opposite – to buy and run businesses that have already derisked themselves and are unlikely to face competition from a new source unexpectedly.

Though Buffett and Page-Brin are coming from opposite ends of the risk-taking spectrum, what makes them one is the corporate structure they have chosen for themselves, where the conglomerate is as visible as its constituent companies for investors. This brings focus, clarity, and accountability to all businesses.
In Berkshire’s case, the individual businesses seldom raise capital from outside investors by seeking a separate listing. In Alphabet’s case, money may be raised differently for different projects. Berkshire is a capitalist; Alphabet will be a venture capitalist.

India’s conglomerates have much to learn from Page, Brin and Buffett.

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