Protecting the Cash Cow: Google's Move Towards The Alph...

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Protecting the Cash Cow: Google's Move Towards The Alphabet

Google's announcement yesterday about the restructuring of its company might have come off as a surprise to many, but it was actually a strategic move to protect its core revenue stream. 

As one might be familiar, governments around the world have an annoying way of trying to take a cut of profits if a company becomes too big. Take the following examples:

US government vs. Microsoft (an anti-trust lawsuit that Microsoft lost in 2007)
US government vs. Electrolux (for its acquisition of General Electronic's appliance division, 2015)
European Commission vs. Google (anti-trust lawsuit against favouring its own companies in search results in April 2015)

“Dominance as such is not a problem,” said  the EU Commissioner in charge of competition policy, Margrethe Vestager,“However, dominant companies have a responsibility not to abuse their powerful market position.” Source: Ars Technica

Google has been accused that it had breached antitrust rules by diverting traffic from rivals in order to favour its in-house services. If they are found guilty, Google stands to lose up to 10% of its annual sales and restructure its business model.

Similarly, Microsoft lost a similar lawsuit in 2007 and had to pay $670 million in fines and change its Windows package to make it more compatible with other systems. In 2009, Intel was fined $1.45 billion for stifling competition and limiting customers’ options by giving several computer manufacturers rebates in exchange for exclusively purchasing the company’s microchips.

However, why not just restructure its business model BEFORE the case outcome? By making Google, a subsidiary of its now-parent company, Alphabet, Google would be effectively shielded from lawsuits stemming from an anti-trust nature. Its other divisions, eCommerce, X-labs, Ventures, NEST et al will all be separate subsidiaries, and it can no longer face similar sort of anti-trust lawsuits, since Google (the search engine, ad revenue, and mobile cash cow) is now a separate entity from the other companies it had previously acquired or invested in. 

But one confusing thing about this new restructuring is the Google stock that trades under GOOG and GOOGL. Not surprisingly, exactly a year before the EU Commission's anti-trust lawsuit against Google, it split its stock from GOOG to both GOOG (class C) and GOOGL (class A) shares. 

However, GOOG stock symbol is now representative of Alphabet Inc, and not Google Inc. 

Bloomberg has to say about the restructuring of Google into Alphabet: "For anyone who owns shares of Google now, no action is required. The stock will automatically convert into Alphabet shares that represent stakes in the same collection of companies that exists today, just arranged differently. The change won’t require a shareholder vote or create any extra taxes.

“The conversion will occur automatically without an exchange of stock certificates,” according to a regulatory filing. “Stock certificates previously representing shares of a class of Google stock will represent the same number of shares of the corresponding class of Alphabet stock.”

Google sets an interesting precedent once again, this time in the legal history of anti-trust lawsuits. King takes pawn. 

NOTE: My colleague, Ashok Parekh commented that the EU has rather broad antitrust parental liability of private equity management companies however, the condition: "a parent company and its subsidiaries will constitute a single economic unit when the parent can exercise decisive influence" over the subsidiary, must be satisfied and the standard of proof being that the subsidiary carries out, in all material respects, the instructions of the parent company." Although the antitrust parental liability of private equity management companies is broad, this remains to be seen if the same would apply to Google's restructuring of Alphabet. I would be interested in what an EU anti-trust barrister says on the matter, however, Google's team of legal advisors at Cleary Gottlieb, are experts in anti-trust litigation on both sides of the Atlantic, and had advised Google of its Alphabet restructuring. 