Google Inc. Chief Financial Officer Ruth Porat is starting to deliver on her pledge to improve transparency at the far-flung company, something investors have sought for years.
Google on Monday said it was reorganizing under a new holding company called Alphabet Inc. As part of the change, Google is breaking out its core business including search from its new endeavors, including its research lab Google X and Calico, which seeks to extend human lives. The aim is to give investors a better idea of how the units are performing and could lay the foundation for potential future spin-offs and acquisitions.
Porat, who will be CFO of both Google and Alphabet, is a 25-plus-year veteran of Wall Street who was hired in May to help oversee the broad transition. She’s already pushing for more of the financial disclosures and discipline that investors expect from a large, diversified business.
“Whatever the consequences, this is her thing,” said Brian Wieser at Pivotal Research Group, while noting it’s not clear how much of this was done before her arrival. “Any incremental transparency into a company as opaque as Google is a good thing.”
The decision comes less than a month after Porat pointed toward more disclosures for the company during her inaugural call with analysts after second-quarter results. She was formerly CFO of Morgan Stanley.
“I’m committed to being direct with you,” she said. “I won’t give you competitively sensitive information, but my goal is to help you understand the business as well as possible.”
Larry Page, co-founder and current chief executive officer, will hold that title at Alphabet, while co-founder Sergey Brin will be president. Sundar Pichai, Page’s deputy, will be promoted to become CEO of Google Inc., which generates the bulk of the company’s $60 billion in annual revenue.
Google has traditionally been stingy with details around how its company is performing — a pattern that has frustrated investors since it first went public in 2004. From time to time, the company has given tidbits on how one part of the business is performing. For example, earlier this year, the company blamed YouTube for dragging down the average price for ads. Google has also flagged specific businesses, such as Google Play, when they have contributed to growth.
Yet the expanded level of transparency should give investors a better way to value the company, according to Sameet Sinha, an analyst with B. Riley & Co. The core business could get a higher multiple based on its higher profitability while the other units may get more attention for revenue — and potential for growth.
“I was expecting that they’d give more information around the core business” he said. “But it was probably the best-case scenario.”
The new set-up makes it simpler to buy companies and just simply put them in the non-core part of the business, according to Colin Gillis, an analyst with BGC Financial LP. That means a company struggling with profitability or user growth could be brought into Google without damaging Wall Street estimates for earnings growth.
“This also gives them the structure to add in another business line if they were to acquire something,” Gillis said. “The mechanism is in place.”
In addition, Google could easily spin off companies that are showing promise, according to Wieser. That way, Google could attract investors that want to invest in a fast-growing business, driving up the stock.
Despite the optimism, it’s not clear how much clarity Alphabet actually will provide under the new structure. Investors might be disappointed if the company comes up short on details.
“Just because they break out a segment for revenue doesn’t mean they will break out cash flows,” Wieser said. Investors may not “know where the capital expenditure is going.”
It’s also not clear how the company will allocate its resources under the new structure. With Google’s core business getting the vast majority of investments, it raises the question about whether the co-founders will be happy with the leftovers going into their favorite long-term projects, said Ben Schachter, an analyst at Macquarie Securities.
Yet Google needs to act. With a stock price languishing until recently, the company was at a disadvantage when competing for workers who often depend on equity for at least part of their compensation.
The move was reminiscent of Amazon.com Inc.’s decision to break out its fast-growing cloud-based business in the first quarter. Since then, the stock has climbed by more than 30 percent.
“You are seeing Google really taking a page out of the Amazon playbook, and expecting that the stock will react favorably — and that will help them with employee attraction and retention,” Schachter said.