As regulators mull break-up, Alphabet investors could see a 50% upside
The US Department of Justice’s antitrust probe into Silicon Valley giant Alphabet – the company formerly known-as (and know parent to) Google – has investors concerned. On the one hand, Alphabet has plenty of experience in this area, given its history in the European Union. And with powerful lobbyists and a specialised legal team, the company seems to have things in hand. But… what if the worst should happen? What if, against all the odds, regulators decide to break up the company? In a reversal of what usually happens in these situations, Wall Street is looking surprisingly bullish.
The realisation that Alphabet could be worth more to investors broken up has caused its stock to rise this week
Source: Yahoo Finance
Needham analyst Laura Martin said in a note that Alphabet could be worth up to 50% more for shareholders if it’s broken up. This contrarian position (Wall Street is not usually a fan of break ups) is justified, she says, by the fact that investors, if given the option to pick and choose what they want to hold from inside Alphabet’s incredibly diverse stable of businesses, would be able to balance risk more carefully. And that, she said, would lead to more investment.
In the note, she wrote: “Investors generally pay more (in aggregate) for pure plays because each investor can decide how much cloud risk vs video risk vs search engine risk vs Waymo risk, etc. they want, rather than owning all of them. If the DOJ decides to break up GOOGL, we calculate there is about 50% upside for shareholders.”
She also thinks that Alphabet’s potential break-up could have other benefits. She said its “disclosures would improve because smaller corp entities make more items ‘material” and that “CEOs of individual entities would have upside tied exclusively to their profits and losses, rather than search engine funding.”
All that said, Martin still thinks worries over the break up are overdone, saying there’s (at most) a 50-50 chance of it (and it’s worth adding that the majority of analysts see the chances of a break up being much lower than that). Still, if the unthinkable should happen, it’s always nice to have a silver lining on the horizon.
Dominion holds Alphabet in its Global Trends Managed Fund.
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