The logo for Google LLC is seen at the Google Store Chelsea in Manhattan, New York City.
Credit: Reuters File Photo
The United States government is considering breaking up Google as a potential panacea for the company’s anti-trust practices, which have come under the European Union (EU)’s radar in the past. On a larger canvas, history is not without precedent in calling out firms seen as too big to fail.
At the core of the discussion lies the value-saturation as a potential precursor leading to disgruntled shareholders with size now being pursued as a hegemonic tool to defy competition. The fate of Google as one of the largest for-profit monolithic corporations on the planet is intrinsically intertwined with an entire genre of agglomerated technology behemoths whose combined market capitalisation at $14 trillion would rank as the third largest economy in the world.
Markets of the 21st century have fundamentally altered the economics governing the market competition with valuation hinging almost exclusively on barriers to entry much to the detriment of fair market practices. The imposition of a combined fine of $17 billion on Apple and Google by the European Court of Justice (ECJ) serves as a case in point.
Ballooning cash combined with patented technology and political clout have often motivated technology czars to break the mutiny of competition with impunity. The apathy suffered by hapless customers due to unscientific pricing has served as a reckoning prompting anti-trust regulators in the US and the EU to rein in large companies and restore public accountability. The renaissance in the technology sector in the post-pandemic era dominated by a flurry of competition from artificial intelligence (AI) aided by slackness on the part of monopolists like Google has played a crucial role in reviving the animal spirit of the competition while awakening the dormant conscience of anti-trust regulators.
Businesses have significant lessons to derive from this episode notwithstanding the legal implications. Small firms tend to outperform their large counterparts measured from stock return performance over time. Firms perceived to be ‘too-big-to-fail’ remain susceptible to stagnation when innovation falls behind size.
Take the case of EMC, whose market and financial prowess were derived from its leadership in cloud computing, which was a decade back the buzzword just like AI is today. EMC was a holding company of VM Ware which mainly contributed to the success of the former. Despite a growing chorus to split EMC into two separate corporations to instil better governance and shareholder performance, the management desisted. As its stock price plummeted, EMC was finally folded into Dell in a deal valued at $63 billion.
The existence of ‘too-big-to-fail’ companies is far too evident in emerging markets including India, which makes the Google case even more relevant. In India, large business conglomerates present across sectors from energy to retail run size risks compounded by concentration of family ownership. Monopolies tend to create price cartels by creating barriers to entry more often through financial power than technological novelty, potentially inviting the wrath of the regulators on antitrust grounds. The recent episode of one of the leading private sector banks in India coming to the tetters of default prompted partly by its refusal to reduce the ownership held by its single largest shareholder serves as a poignant reminder.
Breaking up or corporate restructuring should not be seen as an anathema as most often it ends up enhancing the wealth of shareholders. The parsimonious logic of too-big-to-fail firms failing to capture new opportunities of growth remains congruous with stock price underperformance. Google — given its war chest and political clout — may ultimately devise a labyrinthic corporate structure to survive the day by vaguely abiding by the ruling; if enforced.
Short-termism may hold only so long. Winners in the long run almost always follow the rule of the book —in letter and spirit.
(Ullas Rao is faculty, London Institute of Banking & Finance (MENA), Abu Dhabi, UAE. X: @Ullasrao7)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.