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How Alphabet’s Structure Shows Off Google’s True Value

Feb 02, 2016

Here’s a shocker from the annals of Silicon Valley’s relationship with Wall Street: Optics matter.

The latest proof point for this truism is Alphabet (goog), the holding company for Google and its non-advertising-related siblings, which for the first time on Monday broke out results for its core business from the other stuff. Alphabet decided to show investors the strength of its advertising business (2015 operating earnings of $23 billion) compared with its so-called moonshots (operating loss of $3.6 billion.)

Because investors were so encouraged by the strength of the core, they are likely to reward Alphabet Tuesday by making it the world’s most valuable public company, surpassing Apple (aapl).

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What makes this particularly noteworthy is that in its relatively short existence Alphabet’s precursor, Google, mostly thumbed its nose at Wall Street. When it went public in 2004, it loudly proclaimed that its founders and then CEO Eric Schmidt controlled the company through super-voting shares. As a result, management intended to invest for the long term—short-term results be damned—and investors who didn’t like this were welcome to sell the stock.

I always applauded Google for this position. (Take note: My praise predated my becoming a Google spouse, which I am today.) Google knew it had something so good on its hands that it could tell Wall Street what to do rather than the other way around.

Larry Page on the rationale for creating Alphabet.

What changed? Like most of us, Google has grown up. It still does what it wants, when it wants, where it wants. But it isn’t above coveting a higher stock price, the better to make acquisitions and reward its employees. Segmented reporting changes nothing but the messaging, of course. As Conor Dougherty intelligently wrote in the New York Times: “Google began 2015 as a giant advertising company connected to a collection of intriguing science projects. Alphabet ended the year as a collection of intriguing science projects connected to a highly profitable advertising business.”

Performance matters most. Transparency helps too.

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