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Warren Buffett was last night paid one of the greatest compliments he could have wished for. The world’s greatest capital allocator has argued for years the “conglomerate” structure of his Berkshire Hathaway was the perfect vehicle for wealth-creation. But with conglomerates having become a dirty word after abuses in the 1970s and 1980s, few of his peers believed him enough to follow suit. No longer. Last night, the world’s second most valuable company, $445bn Google Inc, announced it is to restructure – and CEO Larry Page said the move was inspired by Warren Buffett and his Berkshire Hathaway. In South Africa, Brian Joffe saw the brilliance of the conglomerate structure three decades back when using the same skeleton when creating his Bidvest. But like Buffett, there aren’t many of Joffe’s peers who’ve followed suit. Yet. – Alec Hogg
By Adam Satariano and Noah Buhayar
(Bloomberg) — Google Inc. Chief Executive Officer Larry Page speaks affectionately of fellow billionaire Warren Buffett’s approach to business. With the decision to restructure the Internet-search giant, Page is putting Buffett’s influence into practice.
Page on Monday said he’s restructuring Google so that all units outside its main Web businesses like search, advertising, YouTube and mobile software will be broken off and run independently. Page will be CEO of the new holding company, called Alphabet Inc., while longtime deputy Sundar Pichai will become CEO of Google. Google Ventures, research lab Google X, thermostat maker Nest and life sciences company Calico are among those to be owned by Alphabet and managed separately.
The new structure takes a page from Buffett, 84, whose Berkshire Hathaway Inc. is a holding company for disparate businesses ranging from insurance and railroads to running shoes and ice cream. In the past five decades, he’s built one of the largest businesses in the world by eschewing fads, buying when others sell, and taking a long-term approach to investing. Through 2014, Berkshire averaged annual returns of almost 22 percent, more than double the Standard & Poor’s 500 Index.
“They look at Warren as a hero and Berkshire as a template,” said Steve Wallman, a Middleton, Wisconsin-based money manager who has invested in Berkshire since 1982 and bought stock in Apple Inc. in late 2003. He’s not a Google shareholder, but says he wishes he were.
Fellow executives in the technology industry also noted the similarities to Berkshire.
“Google’s Alphabet sounds like a 21st-century Berkshire Hathaway, but with a lot of very large venture bets,” Jeff Weiner, CEO of LinkedIn Corp., said on Twitter.
In a letter to potential shareholders in 2004 ahead of Google’s initial public offering, Page and co-founder Sergey Brin quoted Buffett when outlining the company’s long-term focus.
“Much of this was inspired by Warren Buffett’s essays in his annual reports and his ‘An Owner’s Manual’ to Berkshire Hathaway shareholders,” the letter said, in the lone footnote at the bottom of the statement.
A hallmark of Buffett’s approach has been to let management teams run their units independently. Under Page’s structure for the newly created Alphabet, Pichai takes over as CEO of Google; former Apple executive Tony Fadell leads Nest, which Google purchased for $3.2 billion in 2014; and former Genentech Inc. CEO Art Levinson is leading Calico.
Day to Day
The new structure allows Page, 42, to offload some of the day-to-day operational responsibilities of running the company, while remaining in charge of overseeing the allocation of resources to the different businesses. It’s a similar role that Buffett plays from Berkshire’s headquarters in Omaha, Nebraska.
Buffett has never been a command-and-control-type CEO. The decentralized structure has allowed him to keep the staff at the company’s headquarters to about two dozen, even as Berkshire has grown to employ more than 300,000 people across more than 80 subsidiaries like auto insurer Geico and railroad BNSF.
His main charge has been figuring out how to deploy the company’s capital. Berkshire doesn’t pay a dividend and it rarely repurchases stock, which supplies Buffett with billions of dollars annually to put back into existing businesses or to make new investments. On Monday, he announced one of his biggest deals ever, a $37.2 billion takeover of Precision Castparts Corp., a manufacturer of parts for the aerospace industry.
“Warren says, ‘Send the money to Omaha,’” said Wallman, the money manager. “They’re saying send the money here and we’ll do capital deployment in the same fashion — in the spirit of Warren Buffett, but in the areas that they understand.”
In an October interview with the Financial Times, Page said he looks to Buffett for ideas. “One thing we’re doing is providing long-term, patient capital,” Page told the FT.
Still, there are differences. Buffett has avoided technology investments for most of his career and focused on buying businesses with durable competitive advantages. And he’s rarely built businesses from scratch.
Under the new structure, Alphabet will still get almost all its revenue and profit from Google. The company has been using the cash from the business to fund its other investments, whether it’s acquisitions such as Nest, or research efforts in driverless cars, high-speed Internet service or health-care products.
Technology companies have attempted this strategy in the past with little success, according to David Yoffie, a professor at Harvard Business School. International Business Machines Corp., Nokia Oyj and Hewlett-Packard Co. have over the past several decades added businesses, then sold them off when challenges arise.
Unlike Berkshire, which typically buys well-established companies with steady cash flow, Page must manage a conglomerate tasked with creating hit new technology products.
“You have to be able to manage the innovation process and decide what investments are worth making and which ones are not,” Yoffie said. “The history of this in the technology industry is littered with failure.”
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