Lakshmi Varanasi
Tue, November 15, 2022
Major Alphabet investor TCI sent a letter to Alphabet's CEO Sundar Pichai on Tuesday.
The letter urged the company to cut costs in part by reducing headcount and lowering compensation.
It also called for losses to be "reduced dramatically" in Waymo, Alphabet's self-driving car unit.
TCI Fund Management, one of Alphabet's top investors, sent a letter to the company on Tuesday urging it to slash costs by reducing headcount, lowering worker compensation, and curbing losses in long term bets like Waymo, its self-driving car unit.
The letter noted that "the cost base of Alphabet is too high and management needs to take aggressive action."
Google CEO Sundar Pichai speaking during a Google event in California in 2016.
Justin Sullivan/Getty Images
The London-based hedge fund has been a major stakeholder in Alphabet since 2017, and said its total shares in the company stack up to $6 billion. Despite the scale of its investments in Alphabet, the Wall Street Journal noted that it is "rare for big technology companies to face campaigns from activists such as TCI."
The letter was addressed directly to Alphabet's CEO Sundar Pichai from TCI's managing director, Christopher Hohn, who is known in institutional investment circles for his activism.
TCI's Christopher Hohn.
Peter MacDiarmid/ Getty Images
Hohn noted that TCI was particularly concerned with how bloated Alphabet had gotten over the years. According to TCI's calculations, which were illustrated via color-coded graphs, the company's headcount has grown at a rate of 20% per year since 2017.
Over that time, Alphabet's employees have more than doubled from just above 80,000 to close to 190,000.
"The company has too many employees and the cost per employee is too high," Hohn advised.
"It's 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," Hohn added, quoting Silicon Valley investor Brad Gerstner. He also noted that TCI had held conversations with former Alphabet executives.
TCI was not only vexed by Alphabet's headcount, but also by the company's above-market compensation rates. Hohn pointed out that median compensation at Apple was 153% higher than the 20 largest listed companies in the country.
"We acknowledge that Alphabet employs some of the most talented and brightest engineers, but these represent only a fraction of the employee base. Many employees are performing general sales, marketing and administrative jobs, which should be compensated in-line with other technology companies," Hohn wrote.
Alphabet has announced that it would be pulling back on hiring this year amidst increasing losses. However, it has yet to join fellow tech giants like Meta, Twitter, and Amazon who have or are planning to institute massive layoffs this year.
At the same time, Pichai has echoed TCI's sentiments on employee productivity. At an all-hands meeting in August, he reportedly told employees that "there are real concerns that our productivity as a whole is not where it needs to be for the headcount we have."
TCI concerns, however, extended beyond Alphabet's over-compensated and underperforming employees.
The fund called for the company to reduce its losses in Other Bets, its division where it invests in early stage projects that have the potential to bring in big returns, like Waymo, biotech company Calico, and later-stage venture firm CapitalG.
The payoff, however, has been underwhelming. In late October, the company reported $4.5 billion in losses from "Other Bets."
TCI specifically pushed Alphabet to cull its investment in Waymo. "Unfortunately, enthusiasm for self-driving cars has collapsed and competitors have exited the market," Hohn wrote. "Waymo has not justified its excessive investment and its losses should be reduced dramatically."
Alphabet did not immediately respond to Insider's request for a comment.
Hohn noted that TCI was particularly concerned with how bloated Alphabet had gotten over the years. According to TCI's calculations, which were illustrated via color-coded graphs, the company's headcount has grown at a rate of 20% per year since 2017.
Over that time, Alphabet's employees have more than doubled from just above 80,000 to close to 190,000.
"The company has too many employees and the cost per employee is too high," Hohn advised.
"It's 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," Hohn added, quoting Silicon Valley investor Brad Gerstner. He also noted that TCI had held conversations with former Alphabet executives.
TCI was not only vexed by Alphabet's headcount, but also by the company's above-market compensation rates. Hohn pointed out that median compensation at Apple was 153% higher than the 20 largest listed companies in the country.
"We acknowledge that Alphabet employs some of the most talented and brightest engineers, but these represent only a fraction of the employee base. Many employees are performing general sales, marketing and administrative jobs, which should be compensated in-line with other technology companies," Hohn wrote.
Alphabet has announced that it would be pulling back on hiring this year amidst increasing losses. However, it has yet to join fellow tech giants like Meta, Twitter, and Amazon who have or are planning to institute massive layoffs this year.
At the same time, Pichai has echoed TCI's sentiments on employee productivity. At an all-hands meeting in August, he reportedly told employees that "there are real concerns that our productivity as a whole is not where it needs to be for the headcount we have."
TCI concerns, however, extended beyond Alphabet's over-compensated and underperforming employees.
The fund called for the company to reduce its losses in Other Bets, its division where it invests in early stage projects that have the potential to bring in big returns, like Waymo, biotech company Calico, and later-stage venture firm CapitalG.
The payoff, however, has been underwhelming. In late October, the company reported $4.5 billion in losses from "Other Bets."
TCI specifically pushed Alphabet to cull its investment in Waymo. "Unfortunately, enthusiasm for self-driving cars has collapsed and competitors have exited the market," Hohn wrote. "Waymo has not justified its excessive investment and its losses should be reduced dramatically."
Alphabet did not immediately respond to Insider's request for a comment.
Tue, November 15, 2022
Letters spell the word "Alphabet" as they are seen on a computer screen with a Google search page in this photo illustration taken in Paris
(Reuters) - Activist investor TCI Fund Management has called on Alphabet Inc to cut costs by lowering its headcount and reduce losses in its self-driving unit Waymo, saying the Google parent needs to adjust to an era of slower growth.
The fund, an investor in Alphabet since 2017 with a $6 billion stake, said the company had "too many employees and cost per employee is too high".
TCI said Alphabet pays some of the highest salaries in Silicon Valley, noting that the company has increased headcount by 20% annually since 2017 and more than doubled it since then.
Alphabet did not immediately respond to a Reuters request for comment.
Shares of Alphabet, which has a market capitalization of $1.24 trillion, were up nearly 5% in mid-day trading.
Many tech companies including Meta Platforms Inc are lately making deep cuts to their employee base as part of its restructuring efforts to navigate a potential downturn in the economy, after years of rapid hiring.
Alphabet, which is also struggling with advertisers cutting back on spending, said in late October that it plans to cut hiring by more than half.
"Cost discipline is now required as revenue growth is slowing. Cost growth above revenue growth is a sign of poor financial discipline," the fund said in the letter to Alphabet's management and board.
TCI also called on Alphabet to disclose operating profit margin targets and reduce losses in Other Bets, the unit that includes Waymo and other special projects.
Investments into Waymo were not justified and losses should be reduced "dramatically," TCI said, adding that the autonomous vehicle technology unit has generated $3 billion but recorded operating losses of $20 billion so far. TCI demanded the unit reduce operating losses by at least 50%.
(Reporting by Tiyashi Datta and Nivedita Balu in Bengaluru; Editing by Shailesh Kuber)
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