Google Throws Massive Curveball in New Structure: Alphabet vs. Google

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Google Inc. (NASDAQ: GOOGL) is creating a new public holding company called Alphabet Inc. This represents what may be a paradigm shift in the company’s reporting structure, as well as who is running the day-to-day operations at Google. It is also going to leave many shareholders scratching their heads.

Google will to be asking shareholders to trust management here, albeit new management. Without much surprise, Google shares rose 5% or so in the after-hours session on this news. The belief is that this streamlines the business structure. Still, we have to see what this really means for the Google structure and holders before making a final judgment — and a lot of the issues here will not be known for quite some time.

The new operating structure is said to increase management scale and focus on its consolidated businesses. The main Google business will include search, ads, maps, apps, YouTube and Android, and the related technical infrastructure.

Businesses such as Calico, Nest and Fiber, as well as its investing arms, such as Google Ventures and Google Capital, and its incubator projects, such as Google X, will be managed separately from the Google business.

Under the new operating structure, Larry Page will become the chief executive officer of Alphabet and Sergey Brin will become the president of Alphabet. Dr. Eric Schmidt will become the executive chairman of Alphabet, with Ruth Porat the senior vice president and chief financial officer.

David C. Drummond will become the senior vice president, corporate development, chief legal officer and secretary of Alphabet.

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Larry, Sergey, Eric and David will transition to these roles from their respective roles at Google, whereas Ruth will also retain her role as the CFO of Google.

After the completion of the Alphabet merger, Sundar Pichai will become the new CEO of Google Inc. — he is currently the senior vice president of products at Google, and he oversees product management, engineering and research efforts for Google’s products and platforms. Prior to his current role, he served as Google’s senior vice president of Android, Chrome and Apps.

Google calls this a “Holding Company Reorganization” and it will result in Alphabet owning all the capital stock of Google. The company said:

Alphabet will initially be a direct, wholly owned subsidiary of Google. Pursuant to the Alphabet Merger, a newly formed entity (“Merger Sub”), a direct, wholly owned subsidiary of Alphabet and an indirect, wholly owned subsidiary of Google, will merge with and into Google, with Google surviving as a direct, wholly owned subsidiary of Alphabet. Each share of each class of Google stock issued and outstanding immediately prior to the Alphabet Merger will automatically convert into an equivalent corresponding share of Alphabet stock, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of Google stock being converted. Accordingly, upon consummation of the Alphabet Merger, Google’s current stockholders will become stockholders of Alphabet. The stockholders of Google will not recognize gain or loss for U.S. federal income tax purposes upon the conversion of their shares in the Alphabet Merger.

The Alphabet Merger will be conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company without a vote of the stockholders of the constituent corporations. Effective upon the consummation of the Alphabet Merger, Alphabet will adopt an amended and restated certificate of incorporation and amended and restated bylaws that are identical to those of Google immediately prior to the consummation of the Alphabet Merger, except for the change of the name of the corporation as permitted by Section 251(g). Furthermore, the conversion will occur automatically without an exchange of stock certificates. 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 after the Alphabet Merger. Following the consummation of the Alphabet Merger, shares of Class C Capital Stock and Class A Common Stock will continue to trade on the NASDAQ Global Select Market under the symbol “GOOG” and “GOOGL” respectively. With respect to Alphabet stock, Larry, Sergey, Eric and their respective specified affiliated entities, as well as Alphabet, will be bound, without any modification, by the same restrictions, undertakings and obligations that are imposed under the Transfer Restriction Agreements, related Joinders and other documentation entered into in connection with the prior settlement of the litigation relating to Class C Capital Stock.

Upon consummation of the Alphabet Merger, the directors of Alphabet will be the same individuals who are the directors of Google immediately prior to the Alphabet Merger.

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