Corporate reorganisations - Y are Google turning to the Alphabet?

Corporate reorganisations - Y are Google turning to the Alphabet?

Published:

Author: Robert Pook

Applies to: UK wide

Google has announced a significant reorganisation and the creation of a new holding company named Alphabet Inc. In this update, we consider the reasons why companies may choose to do this.

Google has announced a reorganisation of its group structure. Whilst Google will retain its core internet businesses (including Search, Maps and YouTube), its more diverse businesses (including drones and Google Glass) will be spun out into separate subsidiaries under the ownership of Alphabet Inc, its new holding company.

Reasons to reorganise

There are many reasons why a group may reorganise itself, but most tend to fall under one of the following categories:

  • Tax: changes to a group structure may make it more tax efficient and secure tax advantages
  • Pre-acquisition planning: when a group is planning to acquire a company or business division, a reorganisation may help to provide appropriate space for the target within the group structure
  • Pre-disposal planning: when a group is planning to dispose of a subsidiary or business division, a reorganisation may help by addressing any separation or transitional issues required for the subsidiary's removal, or by incorporating the division into a stand-alone subsidiary it can provide certainty as to what the buyer will acquire
  • Post-acquisition planning: following the acquisition of a company or business division, a reorganisation may facilitate the target's integration into the group structure. This may be by hiving down its assets into existing subsidiaries or transferring it to an intermediary holding company if the acquisition structure was not entirely to the group's liking
  • Efficiency reasons: a reorganisation may be desirable for efficiency reasons, either to create business divisions within one subsidiary, to incorporate business divisions as stand-alone subsidiaries or to reduce the size and complexity of a group structure

Comment

In Google's case, it would appear that the reorganisation stems largely from efficiency reasons.

One of the historical criticisms made of Google is that it has become too diverse, with multiple business divisions that provide insufficient clarity to investors on its strategy and on spending for new products. This is a common issue for companies with multiple business divisions, as the fine detail of each division's performance can be hidden or blurred by the company's consolidated reporting.

Google's response, in the words of founder Larry Page, aims to make the group "cleaner and more accountable" and, in particular, spinning out its non-internet businesses into separate subsidiaries will achieve this by ring-fencing their performance and spending.

There would also appear to be a degree of pre-acquisition planning in Google's actions, as the new structure will allow provide them with the mechanism to add in standalone businesses and subsidiaries should they continue their run of acquisitions.

Regardless of the reason, thorough planning is paramount to any reorganisation and appropriate legal and tax advice should be taken on the specific circumstances that apply. Reorganisations will almost always involve the transfer of shares, businesses and assets between group companies and proper documentation should always be put in place to document these steps.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.