In the fall of 2000, I got a call from a friend who’d just been laid off from online ad company AdForce. He was caught completely off guard by the news; and he was clearly shaken by the scene at the Manhattan sales office, where some of his more established co-workers (family men and women) had much more at stake than he (a single guy, no mortgage).
Conflicting reactions emerged as I spoke to some of our mutual friends. On the one hand, there was general sympathy for his plight, and in fact the plight of many others in his industry. AdForce’s downsizing came at a time when the remnants of failed dot-coms were piling up (in June 2001, the company folded). But there was also a bit of I told you so glibness from those of us who had listened jealously as he discussed – which he did rather too frequently, I might add – his $750,000 in unexercised CMGI stock options. By the time of his layoff, of course, those options were worthless.
Slashing costs, and jobs
Today, you won’t find anyone laughing at the former dot-commers; people are too worried about their own jobs. Few companies, new or old economy, have been spared the effects of the global economic downturn, which was exacerbated by the tragic events of September 11. This is not the first time companies have had to rein in spending, but the circumstances are now more severe than in recent memory, thanks to the unprecedented economic expansion of the last decade.
‘The downsizing is heavier now because of the economy – you have whole industries seeing downsizing,’ says John Challenger, CEO of Challenger Gray & Christmas, the Chicago-based international outplacement firm. ‘In the early 1990s, companies were cutting the bottom 20 percent and getting out of bad businesses. Now it’s going much deeper in every company in every industry.’
Indeed, in the 1990s, investors pushed the equity markets to new heights, which in turn enabled companies to rapidly expand their businesses by using their inflated stock prices or gains from premature IPOs. As Challenger points out, the same investors are today playing a prominent role in downsizing across the corporate sector. ‘Companies now scrutinize their workforce more closely than ever before,’ he explains. ‘The workforce is no longer sacrosanct. It has to be constantly modulated to keep costs in line with revenues. This is all being driven by investors.’
In the technology sector, the ‘modulating’ has been particularly profound, with firms such as Nortel Networks and Lucent laying off 90,000 employees between them. This is, according to Dwight Blazin, technology analyst with Davis Selected Advisers, the other side of a spectacular bull market: ‘My area of expertise is technology, and I don’t think we have ever seen a need for this sort of downsizing in the industry. It’s been brutal.’
Blazin, who co-manages the Davis Growth & Opportunity Fund, says many tech insiders refer to the downturn as the perfect storm. As older segments of the technology sector geared up to support newer areas, they aggressively stepped up production. Electronics increased capacity to fuel the PC boom, and along with telecommunications, these layers expanded in response to the rise of e-commerce. When the newer layers, starting with the internet, began to falter, and as venture capital spending and investors’ appetites sputtered, everything began to collapse.
‘Most people have never seen anything like it,’ says Blazin. ‘There are companies I’ve followed for seven or eight years that have never had to do any downsizing on a broad corporate level, let alone a double digit percentage out of the workforce, and it’s been very painful.’
World perceptions
Most of the layoffs have been in the US – more than 1.6 mn job cuts in the first 10 months of 2001, roughly a million ahead of the total for all of 2000, according to Challenger Gray & Christmas. While much of this has been driven by the US recession, companies also face a more agreeable audience in the US, where layoff announcements are greeted with less protest and agitation than elsewhere in the world. In continental Europe, for example, shedding workers is a more complex affair, from both cultural and regulatory standpoints.
‘In Germany, [layoffs] are often a bit more difficult than in many other countries,’ says Wolfgang Schnorr, deputy head of IR at Deutsche Bank. ‘We have a workers’ council, which is part of our internal organization. All large German companies have them. The councils have to be informed of reductions and have to agree under certain conditions. They take care of the interests of workers. So when you want to come out with something that might affect them – and layoffs are the worst for the representatives of workers’ trade unions, of course – then you always have to try to talk to them first, before you announce anything to the public.’
This sort of consensus building can alienate investors, whose interests typically run counter to union representatives during lean times. To placate both sides, companies have to walk a fine line, as Deutsche Bank did when it announced a 4,500 head count reduction in November, primarily in Germany. ‘You always try to accomplish things in consensus,’ says Schnorr. ‘We told the representatives the situation was unavoidable, but that we would make the cuts in an acceptable manner – mainly voluntary retirement or attrition.’
French electronics giant Alcatel faced similar issues when it recently began instituting its own layoffs. While its cuts focused on temporary workers and other non-permanent employees, it also began its layoffs in the US, where not only was the company’s business hurting, but where the economy is more ‘flexible’.
‘Chances of finding a replacement job in the US are pretty high – it’s a more flexible market, so layoffs are more accepted by the general public,’ says Chris Welton, director of international investor relations at Alcatel’s Paris headquarters. ‘In Europe that’s not true.
A factory worker in France laid off today may not be employed twelve or 18 months down the road. European employers are very picky about hiring, because laying off is very difficult, although the UK is a bit more flexible.’
Eventually, in the face of severe market conditions, companies have to start cutting staff even in less flexible regions. Alcatel for example, recently announced it was laying off an additional 10,000 workers, this time focusing on its European ranks. ‘We’ve cut contract workers first,’ says Welton. ‘Unfortunately, in our industry, the downturn has been more severe, so you have to cut full-time staffers, which we’ve done in the US, and we’re starting to do in Europe.’
Schnorr and Welton both agree that investors, whatever their geographic location, greet redundancies positively. ‘Very often, the view of shareholders is very different from that of employees,’ Schnorr remarks. ‘Usually shareholders agree or are happy, because it should lead to increased shareholder value in the long term. Anglo-Saxon investors are perhaps driven a bit more by shareholder value, but I don’t think there’s a big difference these days.’
Beyond geographic and cultural variances, downsizing and related layoffs come in all shapes in sizes. The dynamics behind them and the way they’re communicated to the market can determine how stock prices react.
‘As an analyst, you want to know what the company’s strategic objective is,’ says Sameer Bhasin, an associate analyst at Jefferies & Company in New York. ‘Is the downsizing taking place because market share is shrinking? If the overall top line is going down, you have to cut costs, so that’s okay. If the company is exiting a specific segment or product line, that’s negative because it may not be seeing growth where it said it did. That’s a structural problem.’
Those ‘positive’ layoffs may still be difficult for employees to swallow, but not investors. Consumer goods conglomerate Sara Lee laid off 7,000 employees worldwide in January 2001, and then followed up those cuts by slashing 10 percent from its corporate ranks – 30 of 300 staffers – in June. The cuts sound significant, but Aaron Hoffman, Sara Lee’s executive director of investor relations, considers them business as usual, part of the company’s overall strategy of refocusing on food, underwear and household products. ‘We did most of our layoffs on the front end, certainly pre-September 11. It was part of our business reorganization, not economically motivated.’
According to Hoffman, Sara Lee’s job cuts were part of the overall integration of recent acquisitions, as it closed redundant plants or reduced head count in the face of increased productivity from newer plants. ‘I would assess the cuts as having very little influence on our stock price, because it’s part of something much bigger – the overall restructuring. Investors understand that.’
Critical cuts
On the flip side are layoffs reflective of more fundamental problems at a company, or problems that are being addressed through a number of initiatives, including employee reductions. In April, San Francisco-based messaging solutions provider Critical Path started to cut 450 from a workforce of some 1,000. As recently appointed investor relations manager Mike Bishop comments, the economic environment definitely added to the company’s problems.
Critical Path’s situation was unique in that until this year the company was on an acquisition spree, according to Bishop. ‘We were in hyper-growth speed and the acquisitions weren’t integrated as fast as they were occurring. Our restructuring efforts aimed first at trimming redundancies. We then identified products and services which were not core to our business, so we decided to divest, either by selling the non-core product or service, or simply by ceasing it if it wasn’t salable.’
The company was also hit with accounting issues in the first quarter of 2001, forcing it to restate its third quarter results and announce reduced results for the fourth quarter. The stock plummeted, with a falling economy accelerating the drop. Bishop, who was hired in June amid a complete management reshuffling, had to handle IR during most of the layoffs, which meant he had a major job to do.
‘I came in when there was a lot of investor concern and anger, because they felt misled by the former management team,’ explains Bishop. ‘I had to work with the new management team to rebuild management credibility, despite the fact that this new team wasn’t around during the problems. Shifting investor perception is accomplished through a lot of positioning in our communications. We announced our restructuring plan, then worked to keep people apprised of our progress.’
Transparency is key when the outlook is hazy: ‘In this economy, revenue visibility is unclear, so we follow the lines of only telling the public and investors exactly what we do know,’ Bishop explains. ‘We’re doing a lot of follow-up and interim releases. We’ve tried to paint an accurate picture of what we’re doing under the hood. Some of our releases talk about how much we bought back in debt, explaining where we stand with the restructuring. A major concern many investors have during a restructuring is maintaining revenues.’
For investors like Blazin, issues such as debt and balance sheet health are important for assessing whether or not a company is cutting the fat or cutting from the bone and, more importantly, whether the cuts are indicative of fundamental problems. He cites Applied Materials and Cisco Systems, two companies that have been hit hard by the technology downturn, as examples of companies making effective cuts.
‘These are companies that are downsizing and laying people off, but they are sending the right signals,’ stresses Balazin. ‘If a company is leveraged and has near-term liquidity problems and is struggling with working capital, and if they have large calls on their cash for capital spending, then they’re more likely to cut into the bone rather than just the fat.’
As Blazin goes on, companies like Applied Materials or Cisco Systems have a lot of cash, ‘So when they make a workforce cut, they make a decision on one level: How do I make healthy cuts, picking the best three out of four employees? Some companies, like Motorola, are cutting people every quarter. They ran into a balance sheet problem.’
Blazin is cautiously optimistic that the tech industry will rebound, with those companies making strategic cuts emerging stronger than ever. That’s the message many companies are trying to convey at a time when economists are still debating whether or not an economic recovery is on the horizon.
