The ABC’s of Google’s Alphabet announcement

Part of Google’s bombshell restructuring, under a new parent called Alphabet, is that its most recent top hire — CFO Ruth Porat — gets even more power. Here’s what the financial issues look like for Porat and Co.

When Ruth Porat, Google’s chief financial officer, addressed analysts on a conference call for the first time in July, she preached one thing: balance.

“A key focus is on the levers within our control to manage the pace of expenses while still ensuring and supporting our growth,” she said at the time.

If only they knew the half of it. Balance was at the center of abombshell announcement Monday, when the company created Alphabet, a holding company for Google’s many businesses. Google will be a slimmed-down version of itself under the new umbrella, focusing on core products like search, email, YouTube and Android, the company’s software that powers smartphones and tablets. More nascent projects — like Google X, the company’s experimental lab focused on moon shots like driverless cars and drones, as well as Fiber, Google’s high-speed Internet initiative — will be broken out into separate companies, with their own CEOs, managed by Google’s co-founders and the Alphabet conglomerate.

As part of the restructuring, Porat gets a bump in responsibility as well: She’ll continue to be Google’s CFO, but will also be CFO of Alphabet. That’s a huge role.

As Page laid out in his announcement, a big part of Alphabet’s raison d’etre is to handle money matters. The brain trust at the holding company will “rigorously handle” capital allocation for each business. They’ll determine compensation for each business’ CEO. Starting in the fourth quarter, the company will also report financials for Google on its own, as well as the rest of its money-losing enterprises — giving investors a better sense of the health of Google’s core business.

In other words: Pull those levers, Porat.

She’s likely the right person to do it. As a Wall Street veteran, Porat, 58, is the counterbalance to the free-wheeling Page and fellow co-founder Sergey Brin. She joined Morgan Stanley in 1987 and held several major jobs at the company, including vice chairman of investment banking and co-head of technology investment banking. A Silicon Valley native, she is a graduate of Stanford and holds a masters degree in administration from the Wharton School. She also serves on Stanford’s board of trustees.

Google landing the well-respected Porat for the role in March was widely acclaimed. Early reviews are favorable. After her first conference call in July, Google had a historic day on the stock market — adding $65 billion to its market cap.

“Ruth has gotten off to a great start right out of the gate,” Joseph Fath, portfolio manager at T. Rowe Price, told The New York Times shortly afterward. She’s also No. 32 on this year’s Forbes Most Powerful Women list.

Here’s what to expect in the era of Alphabet — with Porat as the maestro behind Larry and Sergey.

Moon shot clarity

The future of Google’s self-driving cars was apparently too cloudy for the company’s investors. So, now they get more clarity. Alphabet will report finances for Google’s core products separately from the moon shots like self-driving cars and computer-connected contact lenses, meaning shareholders can get a general sense of the costs for Google’s more out-there projects.

Still, investors won’t get details about everything. For example, YouTube’s financials — a closely guarded Google secret — still won’t be broken out.

“It remains to be seen exactly how much transparency will be provided,” Brian Weiser, an analyst at Pivotal Research Group, wrote in a note to investors. “It may be overly optimistic at this point to hope for discrete business unit breakouts.”

A big payout?

Because capital allocation, the way the company spends money, will come from the very top — a group that includes Porat — some analysts think that could pave the way for shareholder paydays.

“We believe this approach could create an environment for capital returns such as buybacks or dividends,” wrote Ronald Josey, an analyst at JMP Securities.

Hoarding talent

One key to ensuring the company keeps humming — and eventually gets its moon shots to make money — is making sure top execs don’t walk away from Google for high-profile jobs elsewhere. Doling out CEO titles for the independent divisions means Google can reward top talent, especially as they become more in-demand from other tech companies.

Case-in-point: Sundar Pichai has been a frequently mentioned name whenever a glitzy CEO position opens up, notes Evan Wilson, an analyst with Pacific Crest Securities. It’s very unlikely that locking him down was the impetus for the restructuring, but it’s a nice byproduct.

“Google having a new CEO is the biggest part of the announcement,” wrote Wilson, in a note to clients. “We think Sundar Pichai is extremely capable.”

A compelling argument?

One of the things that looms over Google’s head is the possibility of a penalty from the European Union for more than $6 billion. That’s because of a drawn-out antitrust investigation alleging that Google has abused its market dominance to unfairly rank its own products — like Shopping or YouTube — ahead of competitors in search results. The Alphabet restructure isn’t likely to curb the scrutiny from the EU, said James Angel, a professor at the Georgetown McDonough School of Business.

But the restructuring could provide an argument when it comes to other criticism over Google’s reach. For example, if critics call foul over privacy issues with some of Google’s moon shot projects, like its Life Science business or driverless cars, Google’s core business can try to argue that there is a separation. “They may be able to claim, that’s them, not us,” Angel said.

“But, that they will be able to argue that persuasively remains to be seen.”

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