November 27, 2022

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Alphabet faces activist fund call for staff cuts

3 min read

Google’s parent company Alphabet faced a call from a major shareholder on Tuesday to slash its surging workforce and slash hefty salaries for non-engineers, spurring growth.

TCI, a hedge fund that says it owns about $6 billion in Alphabet stock.

The hedge fund’s appeal in a letter to CEO Sundar Pichai came the day after reports that Amazon was preparing to cut about 10,000 jobs in its corporate organization, or about 3 percent of the total. Meta, Facebook’s parent company, last week announced plans for a more drastic 13 percent cut due to falling advertising revenue and the high cost of building the Metaverse.

TCI had previously reached out to Alphabet’s management with its concerns. “All of Silicon Valley has been experiencing similar issues with overpaid and overpaid employees, and they’re taking action,” hedge fund founder Chris Hohn said in an interview with the Financial Times. “This is a broad issue among the big tech companies who need to attack costs. But Alphabet does the opposite.”

The fast pace of hiring at Google’s internet business, which accounts for more than 99 percent of Alphabet’s revenue, has long been a source of dissatisfaction on Wall Street, though concern has grown this year as growth slows and hiring has accelerated. Alphabet hired more than 36,000 people in the last 12 months and increased its headcount by almost a quarter even as advertising revenue fell sharply.

Noting the high growth Alphabet had reported leading up to and during the pandemic, TCI said cost discipline wasn’t a “priority” until last year. But there have been complaints that the recent hiring frenzy has pushed the company’s operating profit margin down from 39 percent last year to 32 percent in the most recent quarter, and that the group’s median salary of nearly $300,000 is two-thirds higher than Microsoft’s.

Pichai wrote to staff in July, calling for “greater urgency, sharper focus and more hunger” as the economic outlook grew more uncertain. He also said Alphabet’s hiring would slow for the rest of the year.

Google founders Sergey Brin and Larry Page control 51 percent of the votes at Alphabet through a special class of voting stock, though they own less than 12 percent of the equity, protecting them from direct shareholder pressure.

TCI’s Hohn said he wouldn’t consider a proxy fight against the Alphabet board because of founder control, but he believes Brin and Page would take action to cut costs. “I believe these founders are rational and want the company to be healthy,” Hohn said. “I think they’d rather be richer than poor.”

“The CEO says he wants to slow hiring and become 20 percent more efficient, but he hasn’t done it yet,” Hohn said. “This longstanding excessive and inflated cost growth needs to be corrected now. It’s out of control.”

In addition to cutting employee salaries by slashing stock compensation and other paid bonuses, Hohn called on Alphabet to drastically cut spending on its so-called Moonshot projects. Much of the $20 billion lost over the past five years on what Alphabet calls its “other bets” was spent on driverless car unit Waymo, he said, adding, “It was a failure . There is no revenue model.”

The TCI letter to Alphabet was first reported by the Wall Street Journal. Alphabet’s stock price rose nearly 2 percent to $97.46 on Tuesday afternoon in New York. Its shares are down a third this year.

The London-based activist fund also had holdings in Twenty-First Century Fox – and had commented on its $71 billion deal with Disney – as well as German automaker Porsche, Canadian National Railway and Airbus Group.

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