TCI Fund Management Urges Google-Parent Alphabet to Cut Costs

On Tuesday, the London-based activist investor TCI, which holds $6 billion worth of stock in Alphabet – the parent of Google – strongly and publicly urged Alphabet to reduce costs in order to improve profit margins. Alphabet’s share price has fallen about one-third this year, due in part, to five consecutive quarters of slowing sales growth at Google.

In his letter to Alphabet’s CEO, Sundar Pichai, TCI’s Managing Director, Christopher Hohn, explained, “We are writing to express our view that the cost base of Alphabet is too high and that management needs to take aggressive action. The company has too many employees and the cost per employee is too high. Management should publicly disclose an EBIT margin target, substantially reduce losses in Other Bets and increase share buybacks.” Alphabet’s Other Bets segment includes its self-driving car unit, Waymo, whose operating losses TCI expects will exceed $6 billion this year alone. Notably, a number of competitors, including Ford Motor Co. and Volkswagen AG, recently abandoned initiatives intended to make self-driving cars a reality.

TCI’s main thrust was that cost control is especially critical during periods of slowing revenue growth. Citing the fact that during the third quarter of this year, total company expenses increased 18 percent over year-ago, while revenue grew only 6 percent, he expressed the viewpoint that, “Cost growth above revenue growth is a sign of poor financial discipline.”

Among other things, the TCI letter argued that Alphabet’s headcount is too high (“the business could be operated more effectively with significantly fewer employees”); median compensation per employee is too high (“153% higher than the 20 largest listed technology companies in the US”); and that share buybacks should be increased (“Alphabet still has over $116 billion of cash on the balance sheet…serving neither shareholders nor the company.”)

Finally, Hohn praised Google Services segment, pointing out that, “Almost two-thirds of revenues come from Search, a very strong business with high underlying margins.” He urged Pichai to publicly disclose an EBIT (Earnings Before Interest and Taxes) margin target for that business specifically and to link Management compensation to achievement of that goal.

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