WORLD-LEADING CORPORATES CONTINUALLY SURPRISE US. IN ORDER TO STAY IN THE ELITE THEY COMMUNICATE MORE AND MORE VISIONARY IDEAS. THEIR MARKET CAPITALIZATION IS LARGELY IMPACTED BY THE PERCEIVED SCOPE AND GROWTH OF FUTURE OPERATIONS, SO THE MORE ABSTRACT & DARING THEY ARE, THE MORE INTEREST THEY RAISE AND HIGHER IS THEIR POTENTIAL. THE WINNERS ARE THOSE WHO RISK A LOT, BUT IN A SMART WAY – CASE OF ALPHABET INC.

Alphabet Inc. is a financial holding, the epicenter of creativity and innovation of incredible scope. Google Inc. currently represents the majority of this holding, while other companies are still in relatively early phases of their development. These are Access, Calico, CapitalG, GV, Nest, Verily, Waymo, X and many other projects, which are about to be spin-offs / carve-outs in the near future. The activity focus is on information organization, investment banking, IT infrastructure, biology and aging, healthcare, home management, transport and logistics, television etc.

Already the name (Alphabet Inc.) symbolizes the organization’s mission, placement of so called »alpha bets«. Albert Einstein once said: »The best investment is investment in one’s knowledge.« and it seems that Alphabet Inc. took this statement seriously. They bet more and more intensively on the combination of technology and learning – machine learning and artificial intelligence.

The potential of these two technologies can be well understood from a simple chess experiment. The computer was given the game instructions and develop its own knowledge of playing based on own iterations. In less than 4h of playing the cumulative knowledge already exceeded the amount of cumulative chess knowledge developed by people through centuries of playing this game. Chess is only one of the examples, in reality there are numerous potential applications. Speaking from the monetary perspective, the value of the market is estimated in trillions of US dollars. The two technologies may result in a double digit GDP growth of the world.

We are probably not even aware of the progress that is about to be made in next years. The cumulative knowledge base will get new dimensions, since the knowledge begins to grow at significantly faster pace. Practically, in line with the IT infrastructure development. Inventions such as Quantum computers, however, will speed things up. New knowledge will open the door to a world of completely different life.

A well-known Chinese magnate and businessman, Jack Ma, at one of the public speeches said: “It is more important that you are the first one, than that you do things perfectly.” With this statement he highlights the importance of the »first mover effect«, the entrepreneurs are still under-aware. Not only that Alphabet Inc. is normally among the ground-beakers, its innovation in combination with market dominance actively address also the so-called »trend setting«.

If so far Google Search was considered as the leading tool for searching information on computers, phones, tablets and other media; the company is opening a new, even more promising chapter. With the integration of artificial intelligence and machine learning they a targeting a more strategic role in one’s life, becoming personal assistants. This will drastically improve the role Google Inc. plays in our lives and of course simplify our operationally challenging everyday. Despite the fact that Amazon’s Alexa and Apple’s Siri came first and were until recently leading by active users, it appears that the winner of this battle is going to be Google Inc., also due to the cross-product synergies.

Innovation is just a base. In order to make an idea a success story, much more is needed. Among others, also the ability of market penetration. Recall how Google Inc. in the past used not only organic approaches, but also corporate acquisitions to speed up the market integration at just the right time. Today, Android probably would not be so well-known and widely used if Motorola Mobility acquisition would not take place back then ($ 12.5 billion, 2012) and accelerate the penetration. The same applies to the acquisition of Nest Labs (USD 3.2 billion, 2014), which enabled the company to develop its presence in households in the IoT segment; and the acquisition of YouTube ($ 1.7 billion, 2006), which enabled Google Inc. to successfully responded to the transfer of traditional television to the world wide web and significantly increase its advertising potential. Mind also the takeover of the Israeli company Waze ($ 1.15 billion, 2013), which significantly improved the Google Maps with more advanced travel time calculation, suggesting the most optimal routes, etc .; or the acquisition of the HTC Pixel Smartphone Division ($ 1.1 billion, 2017), which strengthened the development team in some critical areas and may seriously jeopardize Apple’s Iphone profit cake. Advanced strategic management and bold thinking result in more than 200 other corporate acquisitions made in the last 10 years – Gradient Ventures and the Google Assistant Investment Program play an increasingly important role.

Alphabet Inc. understands very well how important it is to actively monitor and set trends. People’s habits are changing rapidly all the time, opening up new market opportunities. Being the first in key segments such as machine learning and artificial intelligence opens the door to the potential of enormous value generation in the future. Capital un-intensive business requires management to focus its efforts on growth – thus the tendency to focus on end users, user experience, brand perception, customer loyalty, customer satisfaction, etc.

Past financial figures confirm that the tactics is right. Past growth rates are high (Net sales CAGR2014-17: 18.9%; EBIT CAGR2014-17: 16.6%), which partly also reflects smart allocation of resources and the increasingly active penetration of emerging emerging markets such as India, South Asia, China and others.

Source: Alphabet Inc. Consilue analysis.

Despite impressive financial statements, many investors believe in hidden reserves. The complaints relate to the monetization of solutions, excessive share of more expensive equity in the financial structure, unnecessary exposure with short-term financial investments, etc. As a result, the capital market position of the company is not optimal. Measures of protection against hostile takeovers, such as, the issue of multi-class shares with different management rights, which give the founders the main managing role in the company, additionally worsen the situation.

Source: Alphabet Inc. Consilue analysis.

The chart above shows year-on-year increase in surplus cash »Money and short-term financial investments« (31 Dec 2017: USD 102 billion) and its financing. In other words, a substantial portion of equity is used to invest in US bonds and similar short-term liquid instruments. For some stupidity, for others a masterpiece. The fact is that it is very difficult to judge the situation on limited outer data. One of the theories that advocates the current management’s behavior is that the reasons for the significant surplus should be sought in the context of tax benefits. Companies like Alphabet Inc., Apple Inc., Microsoft Inc., Cisco Inc. and others hold a cumulative 0.5 trillion dollars of surplus cash in their balance sheets. Their bargaining power against the tax regulator is strengthening every year and call for a more favored one-time tax treatment, co called »tax holidays«. They wisely wait for the right moment to come. In times of crisis, the saying »Money is the king.« is well-known.

Critics respond with counter-arguments. One of them, for example, is that Google Inc. is with its balance sheet full of surplus funds becoming an important player in the world of investment banking, a world of sharks. Investor doubt in safety of these funds, due to the company mysterious behavior and (little) amount of attention.

From the value point of view, the lever of Alphabet Inc. (Google Inc.) is not really the amount of excess cash, but rather the ability to invest it in a very smart way. Not only within the technology sector, but also wider. The financial holding has a unique weapon in their hands – Google search queries. The latter can be demonstrated with, for example, comparing the number of Google search queries and the Bitcoin (BTC) price development. The correlation between one and the other is extremely high and, as in many other cases, provides a good basis for investment decision making.

Source: Alphabet Inc. Consilue analysis.

Corporate strategy – it is about our path. How we are achieving our goals. How wide and open we look at things. How capable we are to appropriately address macro trends. How we recognize and manage advantages, weaknesses, opportunities and dangers. How we strengthen purchasing power within the industry. How we make advantage of our corporate competences, competitive advantages, capabilities etc.

Google’s strategic management is in many views exceptional. Advanced future-thinking, technology, innovation and creativity. In everyday life, things are of course much more complex than the chess game, but something is certain. Development goes on with the speed of light. The ideas we have been acquainted with a decade ago in science fiction movies are now part of our everyday life. But ideas are not all, they are only the beginnings. Its the corporate strategy who decides whether they will play an active role in our lives or not. Corporates need to do unique, break-through things. Today we need to think about how the life will look in twenty years. We need to think about the virtual reality, personal assistants, gene modification, molecular designing, personalized medicine, (cell)growing of meat etc. Dare to risk, but in a smart way – just as the leading companies do.

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Addressing the pain: EU tax optimization schemes

In the first step, Consilue gained detailed understanding of the business, gathered some preliminary data (incl. owner’s personal tax residency, expectations, limitations) and performed an analysis of the current tax-related expenses.

Then tax consultants analyzed the existing tax optimization strategy. The approach involved tax havens and offshore companies and truly lacked transparency. It also had several significant flaws and drawbacks. The strategy was classified as risky and inappropriate by Consilue. Since the client was risk-averse by nature, tax consultant advise the client not to proceed with its implementation and rather seek for safer EU alternatives.

The work continued with further in-depth analysis. The goal was to find the approach which would on one side result in maximum tax savings and on the other side be as simple and transparent as possible. Together with the client, tax consultants came up with optimal solution to minimize overall tax expenses.

Tax consultants realized that corporate income taxes could be further optimized already within the existing tax environment of one of the companies in the group (Slovenia, EU). In order to do so, the case company would have to acquire a proper growth strategy, which is in fact more business-related measure. Why so? Existing tax environment promotes companies’ investments in selected tangible assets in the form of tax reliefs. Since the client’s business is investment intensive, this is in fact a superb base for the client to optimize taxes. Currently the company sales were stagnating. Investments were on the level of depreciation & amortization (D&A). However, reaching for higher growth rates of sales would result in the need for additional investments and as such further decrease taxes paid. Consilue realized that only with some business restructuring activities within the group of companies in the neighbor countries the client could be in fact paying effectively 0% CIT. It is literally the undeclared tax haven in the heart of EU for corporate income tax optimization when it comes to fast growing investment intensive businesses. The client realized that from the perspective of value generation and value-based-management on the group level, it would also be more rational to move the headquarters and base his future business developments in the given tax environment. Despite the fact that the client liked the idea of CIT optimization for the case company, Consilue proceed with the analysis of best practice of comparable businesses Europe-wide and the effect on value generation. One should be aware that taxes are to be understood in the wider context (corporate income taxes or CIT, dividend taxes or DIV, capital gains or CG, witholding taxes or WHT etc.) and analyzed in line with the group presence and future development.

Tax consultants’ efforts were focused also on the optimization of owner’s personal taxation – dividend taxes and capital gain taxes. The owner expressed willingness to sell the company in the future and was well aware of the importance of personal tax optimization as well. Consilue found the approach aligning with his personal interests, limitations and expectations. The tax rates drop and consequently the total tax savings are to be significant, especially due to the fact that the transaction value expected is significant.

Results: Reaching tax savings in a safer way

The tax optimization strategy resulted in significant savings in taxes paid. What is most important, the strategy was tailored to the client and its needs. It is safe, transparent and simple to understand. It also has no negative image on the corporate brand, since no tax havens and other countries on the so called tax authority black list were involved. The client is comfortable with it and that is the most important.

Taxes paid as competitive advantage

I have to admit. Firstly, I was a bit skeptical about Consilue. Tax experts normally have two or three solutions developed and they stick to this. I was looking for a transparent and safe way to optimize taxes. A business partner recommended me Consilue and I am really glad. Consilue definitely delivered it! The approach was tailored to my business and personal needs. In fact, we transformed tax environment into our competitive advantage. The growth strategy is in my case definitely the right way to go. Tax credit logic and the approach to optimize personal taxes are straight forward and I feel 100% comfortable with the solution. The funny thing is that the approach is scalable and it is actually generating more savings on taxes paid as those risky strategies initially considered with companies in tax havens – offshore company system.

Advisor’s thought: Be comfortable with taxes

Despite the fact that nowadays majority of the world capital runs through tax havens, there are many underlying risks related to it. In case of SME, the cost-value-risk ratio plays important role. Things like complex operation schemes, high costs of legal, accounting and other services, risks of changing the regulation and other critical topics normally cause the clients to prefer straight-forward and transparent tailor-made tax optimization strategies over the offshore company and tax haven alternatives.

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