Friday, August 14, 2015

Is Google/Alphabet the next Berkshire Hathaway?

Will Alphabet (formerly Google) become the Berkshire Hathaway of the 21st century? While some have viewed the comparison as silly, the question deserves further analysis. After all, Larry Page has often expressed his admiration for Berkshire's holding company structure.

Reasonable people will differ in their opinions about the validity of this comparison. While others may concentrate on differences, my emphasis will be on similarities. I'll focus on the M&A activities of the two companies.

Role of M&A in building the companies
Both companies have been voracious acquirers. Since 2010, Berkshire has purchased some 15 companies, while Google has acquired a whopping 125. Of course, many of Google's targets have been small acqui-hires, whereas Berkshire's typical deal is elephant-sized. Indeed, in his 2014  annual letter, Buffett states that he is interested in companies with at least $75 million in pre-tax earnings. Most of Google's acquisitions are far, far away from that number in revenue.

While Buffett has built Berkshire through inorganic growth coming from established companies, Page has developed Google largely through semi-organic growth, which blends existing internal capabilities with acquired external technological talent and resources from developing ventures.

But both companies have become M&A masters, nurturing this form of corporate development into a core strategic capability.

Cash is the fuel for M&A

For both Berkshire  and Google, cash generated from highly successful core operations has been the fuel for M&A. For Berkshire, the cash float from insurance has been a major support. For Google, the fuel has come from rapidly growing high-margin advertising revenue.

Both companies have shunned the use of stock in acquisitions. Buffett has famously declared that he and Charlie Munger would rather prepare for a colonoscopy that use Berkshire stock in a transaction. There have been few exceptions, with Burlington Northern being prominent. Google has used stock in only four major acquisitions, Applied Semantics, YouTube, On2, and AdMob.

M&A integration styles

Berkshire and Google are both obsessed with perfecting M&A integration. For Berkshire, this has largely meant becoming excellent at the art of preservation, allowing great management to continue running companies post-acquisition. For Google, integration has become an artful science with the goal of achieving an alchemic blend of existing and newly acquired talent and technology.

Bottom line on Alphabet mirroring Berkshire Hathaway? Page states that Alphabet can be parsed into alpha-bet, with alpha signaling returns above benchmark. While Page has not emphasized the "bet" piece of the parse, it's clear that what Alphabet is attempting is riskier than what Berkshire does.

It's taken Berkshire Hathaway about 50 years to grow into a $350 billion market cap company. Google has reached $450 billion mark in some 15 years.

I like the alpha bet that Alphabet will become the world's first trillion dollar market cap company over the next five years.

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