August 10, 2015

Google and Berkshire Hathaway in the news

Two major pieces of news greeted me as I woke up this morning:

  1. Google will restructure and launch a new holding company called Alphabet.
  2. Berkshire Hathaway has acquired Precision, a company that makes aircraft parts for $32.3 billion.
I have long admired both companies as they have very clear game plans which they execute almost flawlessly.

Analysts hail both moves for different reasons and below are my key takeaways:
  • By creating a parent company, Google will be able to split it's core business (Google) from it's more experimental projects. For a company that continues to be one of the most innovative in the world, this is good news because by separating the units, it will enable the experimental units to become more agile and flexible while still being able to leverage size of the mother company. Shareholders also hope that it will provide more clarity on whether these experimental project are promising and worthy of future investment but knowing how Google hates having to appease shareholders, I doubt this is their motivation. This is likely a move that the founders hope will enable Google to continue to be at the forefront of innovation while not losing sight of their bread and butter.
  • Mr Buffett strikes again! You know a business has sound fundamentals if Mr Buffett shows interest. In this case, Berkshire has identified a company that is again undervalued by the market and acquired it. As I have learned again and again in business school, there is a gap between fundamental value and actual value because most markets behave irrationally. In this case, Berkshire helps to serve as a rational voice. Now that it has acquired this company, look for the market to view Precision more favorably and for Mr Buffet to again build more value for his Berkshire shareholders. Genius.