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Alphabet is bringing Google up to date on corporate legal tricks

Is the reorganization about startups or shell companies?

As of this week, Google is transforming into Alphabet, a vast holding company that will contain core products like Search and Android under the Google name, alongside newer ventures like Fiber and Loon.

The shakeup has already been hailed as a way of keeping the company weird, or maintaining a startup structure within an increasingly large company — but there's another advantage to the setup that's been less discussed. While Alphabet gives the company's moonshots new opportunities to grow, it also nests them as distinct subsidiaries, each with its own liability, management, and profit stream. It's a common setup among large conglomerates like Sony, General Electric, and HSBC, but this is the first time Google has taken advantage of the arrangement.

"It's a very clean structure, and it works."

In fact, from a corporate structure perspective, the biggest surprise is that Google hasn't split off more of its projects already. In the company's most recent annual report to the SEC, it listed only three subsidiaries: two general purpose tax shelters in Ireland and one international LLC in Delaware. Compare that with Disney, which is less than half the size of Google by market cap, and listed no less than 73 separate subsidiaries in its most recent report. Some of that is simple history: obviously Marvel is going to be separate from Pixar, which is going to be separate from Disney itself. But is it necessary for Walt Disney World to be separate from Walt Disney Parks & Resorts, which is itself separate from Euro Disney? Do we really need an entire LLP devoted entirely to Spider-Man merchandise?

If you're worried about liability, the answer is yes. That bizarrely intricate subsidiary structure means that, if Disney World were abruptly destroyed by murderous animatronic robots, Euro Disney would be nicely shielded from the resulting legal fallout. By the same token, if Project Wing started wreaking havoc on the nation's air traffic control systems, the rest of the moonshot projects could continue unaffected. It's not likely to happen, but these are the nightmares that keep corporate lawyers awake at night, and nested subsidiaries are the product of those sleepless nights.

The result won't change Google's tax bill much (R&D expenses are deductible under either structure), but the liability concerns are real, and many of the lawyers I spoke to were surprised that Google had kept the X projects so exposed for so long. "You would have thought that each new business would have been set up as its own subsidiary, but apparently that was not the case," said Duane Morris' David Feldman, who has written on the advantages of corporate restructuring in the past. Feldman said he likes the simplicity of Alphabet, as an unusually direct way of getting the protection of subsidiaries. "It's a very clean structure, and it works."

Those factors may ultimately prove secondary to the startup benefits I wrote about earlier this week, but they do put the restructuring in a different light. The restructuring will empower Google's moonshots, certainly, but it also brings it up to date on some of the tricks pioneered by the faceless conglomerates of the world. And while Google looks to emulate lean startups and agile VC firms, it's also taking cues from Disney and GE, and looking more and more like a corporate behemoth.

Verge Video: What's behind Google's Alphabet shakeup