Opinion: The true mastermind of Google’s Alphabet? Warren Buffett

Fathead

When Larry Cunningham published his book on the management lessons of Berkshire Hathaway and Warren Buffett, his first book-tour stop last fall was at the Mountain View, Calif. home of Google. More than 100 people showed up, and apparently they listened.

Pundits have spent the week debating whether Google’s

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 plan to turn itself into a holding company called Alphabet, separating its core search-advertising business from nascent-to-emerging units including Nest Labs, Google Glass and the company’s driverless-car program creates something akin to Berkshire

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 or to old-style conglomerates such as General Electric

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 or ATT

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 in the heyday of Bell Labs.

The answer lies in Google’s longstanding admiration of Berkshire and Buffett — down to appropriating Buffett’s habit of uncommonly readable shareholder letters from their initial public offering prospectus onward — and in this week’s note from Google co-founders Larry Page and Sergey Brin describing their own role at Alphabet in almost exactly the same terms Buffett often uses to describe his job.

“They really understand Berkshire,” said Cunningham, author of “Berkshire Beyond Buffett: The Enduring Value of Values” , about Google’s founders “There’s something to this. I think it’s real.”

Alphabet, Google’s new parent, is born

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Alphabet, Google’s new parent company, reflects a sweeping reorganization that separates the company’s highly profitable search and advertising business from its “moonshots.” The WSJ’s Diana Jou has the details.

Indeed, Page and Brin are going to do what Buffett and his longtime partner Charlie Munger are famous for: They’ll allocate capital among Alphabet’s businesses and determine how the CEO of each unit is paid, according to Page’s blog post announcing the move.

Building a “New Economy Berkshire” (NEB if it works, and NEBbish if it doesn’t) will take some of the same skills Buffett and Munger have shown — and several big ones they never claimed to have, especially judging which technologies are rising and which will soon be obsolete, Cunningham said.

First, a NEB requires skill at acquisitions — a core Berkshire strength Google has demonstrated repeatedly. Google’s $1.65 billion acquisition of YouTube in 2006 is now a business that Morgan Stanley analyst Brian Nowak predicts will reach $11 billion in revenue next year. With Twitter

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 trading at six times projected 2016 sales, that conservatively makes YouTube worth $60 billion.

Google has succeeded at this more than once. Its Android mobile-phone platform grew from a $50 million acquisition. Its travel business, which brings in $2.5 billion in revenue from online-travel agencies Expedia and Priceline alone, is built around a $676 million deal to buy ITA Software — which was already the leader in searching airline-flight databases and whose CEO, Jeremy Wertheimer, is still at Google. Buying Zagat added Yelp-like content to Google Maps for $151 million.

When Google does screw up, it tends to screw up small. And it has nimbly hedged financial risks on big deals, like when it paid $12 billion for mobile-phone maker Motorola Mobility and still came away making money on what, at bottom, was a busted deal .

Another Buffett hallmark is giving CEOs of divisions enough independence to keep them happy — and keep them around. Retaining Wertheimer suggests that Page and Brin will give CEOs of the non-Google parts of Alphabet both freedom and capital. Another example: Nest Labs CEO Tony Fadell, who sold the Web-enabled thermostat company to Google for $3.2 billion last year, has stuck around for Google’s drive to make Nest the centerpiece of its pursuit of the Internet of Things.

“Berkshire adds value, and it wasn’t always that way,’’ Cunningham said. “Now Berkshire is  a brand. Google has the same name leverage and the capital. You put YouTube in it and it just exploded. If you could do that with the autonomous car, it would be huge.”

It’s no stretch to imagine Nest could one day be like Geico Insurance, a favorite of Buffett’s, who bought his first shares in 1951. Or that Chris Urmson, the head of Google’s driverless-car program, builds it into a variation on Tesla.

Visions of Berkshire-like value creation didn’t drive this week’s jump in Google’s shares. That’s due to hopes that disclosing Google’s segment results will pump up multiples for ad businesses, which generate 90% of revenue. Plus, Morgan Stanley’s Nowak predicts, shining a spotlight on emerging-business losses he estimates at $8 billion to $9 billion will reinforce new Google CFO Ruth Porat’s cost-conscious ethos.   

Of all the things investors have wanted from Google, a dividend is really the only thing left. But Berkshire doesn’t pay dividends, either.

Over time, Cunningham said, Alphabet’s potential will be in whether its structure and money, and the halo of Page and Brin, can entice entrepreneurs to sell Google companies that Alphabet can then take to a higher place. That’s how Berkshire made everything from railroads to real estate brokers more successful. 

Plenty in Google’s history works in its favor.

Article source: http://www.marketwatch.com/story/the-true-mastermind-of-googles-alphabet-warren-buffett-2015-08-17