Google’s parent Alphabet faced a call from a large shareholder on Tuesday to cut its soaring headcount and slash high salaries paid to non-engineers, in the latest sign of the pressure building on the biggest US tech companies to overhaul their businesses for an era of 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 had previously approached Alphabet’s management about its concerns. “All of Silicon Valley has seen similar problems of having over-hired and overcompensated people and they are taking action,” said the hedge fund’s founder, Chris Hohn, in an interview with the Financial Times. “This is a broad theme across the major tech companies that need to attack 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.
Pointing to the high growth Alphabet reported in the run-up to, and during, the coronavirus pandemic, TCI said cost discipline had not been 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 wrote to staff in July calling for “greater urgency, sharper focus, and more hunger” as the economic outlook became 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 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 said he would not consider a proxy fight against the Alphabet board because of the founders’ control, but that he believed Brin and Page would take action to cut costs. “I believe those founders are rational and they want the company to be healthy. 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. “This longstanding excessive and bloated cost growth has to now be corrected. It is out of control.”
Along with cutting employee pay by reducing the stock compensation and other bonuses it pays out, Hohn called on Alphabet to dramatically cut its spending on its 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. There’s no revenue model.”
The TCI letter to Alphabet was first reported by the Wall Street Journal. Alphabet’s share price rose almost 2 per cent to $97.46 by midday in New York on Tuesday. Its shares have fallen by a third this 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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