Alphabet’s latest investment draws comparisons with Berkshire Hathaway
Alphabet subsidiary, Google Capital has taken a large stake in a publicly traded company, in a move eliciting comparisons with Berkshire Hathaway, the $250bn powerhouse. Although the price of $46.35m paid for the holding in Care.com is not in itself significant, it makes Google Capital the company’s largest shareholder and gives the fund a seat on the board.

Alphabet (ticker: GOOG, GOOGL) subsidiary Google Capital is doing something it has never done before: It's taken a large stake in a publicly traded company. It's the very strategy that's helped Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) morph into a $350 billion powerhouse.

Are we seeing a shift in Alphabet's growth strategy?

It's possible. The $46.35 million investment isn't going to break the bank for Google's parent company, which at last check had more than $75 billion of cold, hard cash in its coffers. But it also made Google Capital the largest shareholder of Care.com (CRCM) – which was worth $278 million at the time – and gave the fund a seat on its board.

That's a distinctly Buffett-esque approach. Berkshire is the largest shareholder of the Coca-Cola Co. (KO), for instance, owning 9.3 percent of all outstanding shares, and has installed Howard Buffett, Warren's son, as one of the 15 members of the board.

Granted, the stake in Care.com appears to be strategic, with Care.com gaining access to Alphabet's vast pool of tech and talent while Alphabet establishes a strong footing in the growing and demographically auspicious home care market. Berkshire Hathaway, on the other hand, is just as happy to invest in Coca-Cola as it is American Express Co. (AXP) or International Business Machines Corp. (IBM) – it doesn't need to bring them under its fold.

The Care.com investment is peripherally strategic, yes. But when the company formerly known as Google restructured last year into a holding company it dubbed Alphabet, it did so in part so it could make large, discrete bets on businesses that wouldn't necessarily tie in to its core search business.

To that end, Google Capital is one of the mechanisms Alphabet can use to diversify itself. An investment-focused arm of Alphabet, Google Capital succinctly defines itself as a "growth equity investment fund."

Elephant, meet room.

The awkward question for Alphabet investors is this: Does the company need to start making some big, game-changing acquisitions – think Berkshire's 2015 purchase of Precision Castparts for $37.2 billion – in order to move the needle?

Matthew Carbray, certified financial planner and managing partner at Ridgeline Financial Partners, says the Care.com move is just Alphabet "dipping its toes in the water a little bit." More is yet to come, he expects.

He anticipates that Alphabet will be "more active" in public markets in the years ahead, to say the least. "You'll see them engaging with existing publicly traded companies and utilizing their capital to take over a company, given their size and scope."

On the other hand, search hasn't died out yet, so others don't think Alphabet will be quite so aggressive.

Barry Randall is portfolio manager of the Crabtree Technology portfolio on Covestor, a registered investment advisor based in Boston. He doesn't see Alphabet adopting a truly Buffett-esque approach – investing in a potpourri of distinct, fundamentally sound businesses that may not relate to each other at all – for another five or 10 years.

"When the search engine business – which is still going quite strong as they move further into mobile search and international markets with their search" starts to wane, that's when Alphabet may pivot more forcefully to a Berkshire-like model, he says.

Whether or not Alphabet truly needs to pull out its proverbial elephant gun, there are still other parts of the Care.com deal that harken back to Buffett's deal-making philosophy. By buying Care.com preferred stock, GOOG entitles itself to a handsome 5.5 percent annual dividend for the next seven years, a structure similar to what Buffett has been known to seek in deals of his own.

Roughly five years ago, Buffett's Berkshire Hathaway struck a $5 billion preferred stock deal with Bank of America Corp. (BAC) that gave Berkshire a 6 percent annual dividend and warrants to purchase an additional 700 million shares of BAC stock at $7.14 per share.

Bank of America shares closed July 5 at $12.74 per share, making Berkshire's warrants worth about $3.92 billion. On the fifth anniversary of the deal in August, Berkshire will have also collected $1.5 billion in dividends from the deal. Assuming BAC stock trades sideways until then, that's a 108 percent return on $5 billion in just five years.

As they sometimes say in real estate, that money was made on the buy side – Buffett extracted sweetheart terms from Bank of America, which at the time was trying desperately to persuade markets that its Countrywide mortgage obligations wouldn't cripple its core business. Buffett's vote of confidence helped to directly quell those fears, and shares would begin rebounding in earnest just a few months later.

Alphabet, too, has leverage.

"In this case, Care.com needs Google Capital a lot more than Google Capital needs Care.com," Randall says. "The dividend and the preferred shares together reflect the power dynamics between the two companies. It's an ongoing reminder to Care.com that Alphabet is not planning to be a passive investor."

So bravo to Google Capital for negotiating some juicy terms for itself. But why make such a tiny deal if it's not going to move the needle? A big part of the answer is that 5.5 percent annual dividend.

Carbray reminds just how unusual a yield like that is in today's day and age: "They have so much cash coming in that it has to be deployed in one way or another and if they can't deploy it in a way technologically – much in the way that Apple (AAPL) kind of struggles to deploy their capital – shareholders are going to demand that they're putting it somewhere productively."

"Cash is not doing much of anything … as a matter of fact, in a lot of places in the world you're dealing with negative real rates. Companies need to deploy that, and shareholders are demanding that they deploy it," Carbray says.

Yale Bock, portfolio manager of the GARP portfolios on Covestor and president of Y H & C Investments, says the Care.com move likely won't affect much direct change in Alphabet's stock price. He calls the $46.35 million investment "spare change" for Alphabet, noting that the company is worth about $480 billion.

What's far more important about this Care.com maneuver, according to Bock, are its implications for Alphabet's merger and acquisition strategy going forward.

"It's possible with the large cash hoard (Alphabet) has, other companies could warrant direct investments and potential takeouts, especially in areas GOOG wants an increased presence," like media, he says.