Alphabet faces call from activist fund to cut headcount

Alphabet faces call from activist fund to cut headcount

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Google’s parent Alphabet was contacted Tuesday by a large shareholder to reduce its soaring headcount, and to reduce the salaries paid to non-engineers. This is the latest sign that the pressure is building on the largest US tech companies to restructure their businesses to allow for slower growth.

TCI, a hedge fund that said it owns about $6bn of Alphabet shares, called for “aggressive action”, including a dramatic cut in Google’s long-running investment in driverless cars and a big increase in share buybacks.

The hedge fund’s call, in a letter to chief executive Sundar Pichai, came the day after reports that Amazon was preparing to cut about 10,000 jobs from its corporate organisation, or roughly 3 per cent of the total. Meta, parent of Facebook, disclosed plans for a more swingeing 13 per cent cut last week as it deals with falling advertising revenue and the high costs of building the metaverse.

TCI previously contacted Alphabet’s management to express its concerns. Chris Hohn, the founder of the hedge fund, said that Silicon Valley has experienced similar problems with over-hired or overpaid employees and that they are taking action. “This is a common theme across major tech companies that needs to address costs. But Alphabet is doing the opposite.”

Alphabet declined to comment.

The rapid pace of hiring at the Google internet business, which accounts for more than 99 per cent of Alphabet’s revenue, has long been a source of unhappiness on Wall Street, though the concern has increased this year as growth has slowed and recruiting has accelerated. Alphabet added more than 36,000 workers in the past 12 months, lifting its headcount by nearly a quarter, even as advertising revenue slowed sharply. TCI pointed out the high growth Alphabet reported during the coronavirus pandemic and said that cost discipline was not a priority until last year. But it complained the latest hiring binge had driven the company’s operating profit margin down from 39 per cent last year to 32 per cent in the latest quarter, and that the group’s median salary, at nearly $300,000, was two-thirds higher than Microsoft’s.

Pichai urged staff to be more urgent, more focused, and hungry as the economic outlook became uncertain. He also stated that Alphabet’s hiring pace would slow down for the remainder of the year.

Google founders Sergey Brin and Larry Page control 51 per cent of the votes in Alphabet through a special class of voting shares, despite owning less than 12 per cent of the equity, insulating them from direct shareholder pressure.

Hohn stated that he would not consider a proxy battle against the Alphabet board due to the founders’ control but that he believed Page and Brin would take steps to reduce costs. “I believe that those founders are rational and want the company’s health to be strong. I think they would rather be richer than poor.”

“The CEO says he wants to slow hiring and be 20 per cent more efficient, but he hasn’t actually done it,” Hohn said. It is time to end this long-standing, excessively high and bloated cost growth. It is out of control.” Hohn called for Alphabet to drastically reduce its spending on so-called moonshot projects. Much of the $20bn lost in the last five years on what Alphabet calls its “other bets” had been spent on driverless car unit Waymo, he said, adding: “It’s been a failure.

The Wall Street Journal first reported the TCI letter to Alphabet. Alphabet’s share price rose almost 2 per cent to $97. 46 by midday in New York on Tuesday. Its shares fell by a third this fiscal year.

The London-based activist fund has also held stakes in Twenty-First Century Fox — and had spoken out over its $71bn deal with Disney — as well as German carmaker Porsche, Canadian National Railway and Airbus Group.

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