> Warren Buffett Blog: Google Alphabet copying Berkshire Hathaway model

Wednesday, October 28, 2015

Google Alphabet copying Berkshire Hathaway model

Google's recent announcement of a change in corporate structure with the release of "Alphabet" is explained in a simple concept - Alphabet is the farm, and Google is its most successful crop.

Rather than nurturing the Google brand and using its substantial ad revenue to support various cash-bleeding projects, Alphabet will look for each subsidiary to support itself instead of just living off Google.

“Alphabet is an attempt to build a holding company like Berkshire Hathawayout of an existing operating company,” Alphabet CEO Eric Schmidt said, according to one report. “It’s never been done before. We’re trying to push the Alphabet companies to be separate companies, not divisions.|

 Schmidt pointed to the person in charge of self-driving car initiatives, who will become the CEO of that business “and bear the downside and the upside” that comes with it.

This is just like how Warren Buffett runs Berkshire, giving complete autonomy to subsidiaries including Geico, Dairy Queen and Heinz. After how in the world could one person run and fully understand all those disparate businesses?

The heart of Buffett’s investing strategy and Berkshire’s management structure is a long-term value proposition and not quarter-to-quarter shenanigans or interoffice politics. If Google truly embraces this mindset, it could be a very powerful way to both foster innovation and also demand greater accountability from individual pet projects which currently aren’t standing on their own feet.

Of course, don’t think GOOG stock is going to be throwing its own shareholder meetings with the same flair as Buffett with his “Woodstock for Capitalists” in Omaha. For starters, Alphabet is still incredibly reliant on Google ad sales right now and will be for the forseeable future regardless of this posturing. Furthermore, Alphabet Inc. still has a dual stock structure that consolidates power in the hands of a brain trust that includes Schmidt, Larry Page and Sergey Brin. This trio can (and will) continue calling most of the shots for the near-term.

But if you are a long-term investor who believes in the ultimate promise of innovation at Alphabet and GOOG stock, you should be encouraged by the fact that Warren Buffett is the role model Schmidt is aspiring to, and that Berkshire Hathaway is the archetype for the kind of company he wants GOOGL to become.