Activist investor TCI to Google CEO Sundar Pichai: Cut headcount and trim costs

Google parent Alphabet Inc has been asked to reduce headcount and scale back expenses by investor TCI Fund Management Ltd. The London-based hedge fund, TCI, is owned by billionaire Christopher Hohn. In an open letter to Google-parent Alphabet’s CEO Sundar Pichai, activist investor has urged the company to make hard choices. Management should publicly set a target for profit margins, increase share buybacks and reduce losses in its portfolio of Other Bets — the company’s long-shot projects, TCI managing director Chris Hohn says. Here are key excerpts from the open letter as it appears on TCI website:
Headcount is too high
“Our conversations with former executives of Alphabet suggest that the business could be operated more effectively with significantly fewer employees,” Hohn writes. “We agree with Altimeter Capital’s Brad Gerstner, who wrote: ‘It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people.’” “Alphabet’s headcount has increased at an annual rate of 20% since 2017,” he adds. “It has more than doubled since 2017. This growth is excessive, both in relation to historic headcount growth and what the business requires.”

Compensation per employees is too high
Alphabet Inc’s 14A filing showed staff’s median compensation was $295,884 in 2021, making it 67 percent higher than Microsoft and “153 percent higher than the 20 largest listed technology companies in the US.” “There is no justification for this enormous disparity,” he has written, adding that while the company “employs some of the most talented and brightest computer scientists and engineers,” many other employees “are performing general sales, marketing and administrative jobs” and “should be compensated in-line with other technology companies.”
Reduce losses in other bets
Hohn further urges Alphabet to scale back losses in its ‘Other Bets’ unit, which includes self-driving car project Waymo. ‘Other Bets’ on the whole has generated just $3 billion in cumulative revenue over the last five years along with $20 billion in cumulative operating losses, he said. “In a new era of slower revenue growth, aggressive cost management is essential,” he continued.

Increase share buybacks
TCI asks for an increase in share buybacks and the establishment of an EBIT margin target for Google Services. EBIT margin is a measurement of a company’s operating profit as a percentage of revenue. Google Services posted a 39% EBIT margin in 2021. The letter says that a margin target of “at least 40% is reasonable.”