A Google by any other name would actually smell 5 percent more sweet.
That, at least, is how much the search engine's stock price shot up after it announced it would be calling itself "Alphabet" from now on. Why? It's not that investors care about the name itself. It's that investors care about what the name says about how it will run itself.
Now, Google will still be Google. You don't have to start saying "let me alphabet that." But instead of having a panoply of projects ranging from YouTube to Gmail to Google Maps to Android to Chrome to self-driving cars to delivery drones to anti-aging tech all fall under the banner of "Google," the most far-flung ones will be part of a new company called "Alphabet." Google, in other words, will just be search and other Internet-y things, and Alphabet will be the moonshots. Well, the moonshots and Google. Alphabet, you see, will be the parent company that also owns Google-the-search-business as a subsidiary. This is just a rebranding and a reorganization.
Markets, though, thought it was the best thing since selling display ads against search results. As you can see below, Google, or rather Alphabet's, stock soared 5 percent on the news. Not bad for a name change. (That gain was holding in pre-market trading Tuesday.)
But this doesn't make much sense when you consider that Google's business hasn't changed. It's still a search company that uses its monopoly profits to subsidize speculative science projects and invest in startups. Google was a conglomerate before, and it's still one now, just with a corporate structure that better reflects that fact. It turns out, though, that that was all it took for investors to do a dance of joy.
If there's one thing Wall Street hates, it's companies that spend money without having any way of knowing whether it will pay off or not. That's money, after all, that businesses could be sending to investors as a nice, fat dividend—which, in turn, would send stock prices up as well. Tech companies like Google, though, have been able to insulate themselves from this pressure to sacrifice their dreams on the altar of shareholder value by creating ownership structures that keep power in their founders' hands. That's let Google pour profits into balloon-powered Internet and self-driving cars and whatever else has caught Larry Page and Sergey Brin's fancy, with Wall Street unable to do anything other than whine about it.
Well, that's mostly true. Wall Street might not be able to stop Google from investing in moonshots, but it can still push Google's stock down. And that, more than anything else, is why the company is overhauling itself. Google wants to convince investors that it's not throwing their money away on long shots that are really no shots. By splitting itself in two, Google can show people how much its search business is making versus how much its other businesses are spending. That alone should give investors an idea what Google's value would be if it stuck to search, which should help keep its actual value closer to that. It's a way to push the stock price up without cutting all the side businesses down.
But more than rebranding Google, this is about rebranding Larry Page and Sergey Brin. The two haven't exactly endeared themselves to Wall Street with the way they've semi-haphazardly thrown money at anything that seemed cool—remember Google Glass?—without much regard for its business prospects. So now they're trying to present themselves not as Silicon Valley nerds, but rather as Silicon Valley Warren Buffetts. Indeed, Page has invoked Buffett's Berkshire Hathaway as the kind of well-run conglomerate—yes, they exist—that Google aspires to be. And that's why the two emphasized that, in their new roles running Alphabet, they will "rigorously handle capital allocation and work to make sure each business is executing well." In other words, the checks are about to get even less blank. The most promising projects will get money, and the rest will get put out to pasture. That's no different than how Google already operates, but it's just putting that in the unsentimental language of cost-benefit analysis—Wall Street's favorite.
A Google that understands how to play Wall Street's game is a Google that can play its own. Even if it calls itself Alphabet.