Google, Coming To Grips With Its Giant Size, Forms A Parent Company: Alphabet

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SAN FRANCISCO — Google, coming to grips with its gargantuan size and the disparate nature of its many businesses, is forming a parent company called Alphabet in a move to streamline its corporate structure.

The shakeup reflects the 17-year-old company's sprawling interests, which include Internet search, drones, investments, healthcare, wearables, online shopping, glucose-sensing contact lenses and self-driving cars. Under Alphabet, the company aims to better organize those businesses by operating as a collection of separate entities.

The largest will be Google, which will contain core businesses including search, ads, maps, YouTube and Android. It will be managed separately from investment arms Google Ventures and Google Capital, and other projects such as Fiber, Nest, Google X, Calico and Life Sciences.

The executive suite also gets a reshuffle: Co-founder and current Google Chief Executive Larry Page will become the CEO of Alphabet. Co-founder Sergey Brin will be Alphabet's president, and Eric Schmidt, currently executive chairman of Google, will become executive chairman of Alphabet.

Sundar Pichai, currently Google's senior vice president of products, will become Google's new CEO.

Alphabet Inc. will replace Google Inc. as the publicly traded entity, and all Google shares will automatically convert into the same number of shares of Alphabet, Page said in a blog post. Symbols for the company's dual-class shares, however, will remain GOOG and GOOGL.

Page said Google was changing its structure to keep things fresh.

“We've long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes,” he wrote. “But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.”

Google shares shot up more than 6% in after-hours trading following the announcement.

Analysts say the new structure should lead to better focus and financial transparency.

The core Google entity gets full-time CEO attention, while the funding for other projects can be better financed and managed.

Page has long championed the funding of ambitious long-term projects with grand, world-altering rhetoric.

But critics have wondered whether the company is too loose about what it funds and whether those plans are distracting executives from the foundational Internet business.

Forming the holding company puts more pressure on those businesses to stand or fall on their own.

“If each of these projects are its own company and separate from the Google mother ship, then they can do anything they want with it,” said Roger Kay, founder of independent market intelligence firm Endpoint Technologies Associates. “It also allows them to demonstrate the financial achievement of different divisions.”

John Simpson, privacy project director at the advocacy group Consumer Watchdog, said Alphabet could get investors who complain about sky-high spending on moon shots off its back. It could benefit in terms of taxes and from lower penalties in a European antitrust investigation. The company also increases its flexibility in acquiring companies without having to merge them into the core business.

“It's a vehicle that gives them lots of opportunities for further creative accounting,” Simpson said. “They're a huge dominant force on the Internet, and they will continue to be that whether they are called Google or Alphabet.”

The new structure is also a huge opportunity for newly named Google CEO Pichai, 43, who has ascended from overseeing one Google service when he joined the Mountain View, Calif., company in 2004 to managing nearly all of them.

He started with the Google Toolbar, an add-on for Internet browsers that served as a shortcut for doing a search. He pushed Google to make its own browser, Chrome.

That spurred the development of a full-fledged computer operating system, Chrome OS, as well as a line of laptops.

Gmail and other apps became part of his purview, and, later Android, the mobile operating system. Twitter tried to hire him in 2011, a failed attempt that brought the calm, straightforward executive further into the limelight.

Elevating Pichai to the top role at Google was likely a move to keep him from leaving, said Mike Vorhaus, tech analyst at research firm Frank N. Magid Associates.

“He must be receiving a million calls from headhunters every day,” he said. “This move is a huge compliment to Sundar. It answers the question of whether Larry is stretched too thin, and it gives Sundar an incredibly special title.”

Last October, Pichai took the helm of Google's moneymaker: Its search and advertising businesses. Many saw that as a clear indication that Google's co-founder viewed Pichai as CEO material.

In Monday's announcement, Page praised Pichai, noting that he “has really stepped up since October of last year, when he took on product and engineering responsibility for our Internet businesses.”

“Sergey and I have been super excited about his progress and dedication to the company,” Page wrote. “And it is clear to us and our board that it is time for Sundar to be CEO of Google.”

Google has grown to more than 57,000 employees from 2,000 when Pichai started. Yet he has managed to navigate the company's shifting corporate politics. Last year, Page in an interview with Businessweek said Pichai's leadership stemmed from a rare combination of “deep technical expertise, a great product eye and tremendous entrepreneurial flair.”

Before joining Google, Pichai worked at consulting firm McKinsey & Co. and technology firm Applied Materials. He grew up in southern India but moved to the U.S. for graduate school.

Recently, conglomerates and huge companies such as W.R. Grace, Hewlett-Packard and Ebay have been splitting themselves up as investors seek out businesses that have a tighter focus.

Although the average Google user won't notice the reorganization, the company nonetheless wanted to “demonstrate clarity,” Kay said.

“What's funny about it is it shows the company gets it,” he said. “They're admitting this hodgepodge, this alphabet soup.”

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Lien reported from San Francisco; Dave and Chang from Los Angeles.

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