Companies’ Layoff Strategies A First Step? Four Questions For Investors

With the economy slowing down, companies say they are laying off employees to trim excess staff, restructure/refocus activities, and put future growth ideas on hold. While layoffs now make sense because the first quarter is a seasonally slow period, there are four questions that need answering for investors to understand what comes next.

Question #1 – Why layoffs now?

Usually, companies prefer to shift workers elsewhere. After all, they are loyal, committed and proven employees – plus, it’s the humane thing to do. Add to that today’s ongoing challenge to hire qualified newcomers, and it seems the smart company action to take. Therefore, terminating hundreds or thousands in one fell swoop is a red flag that raises this question to the top for investors and the media.

Question #2 – Why such large layoffs?

Some companies are defending their sizable layoffs by saying they represent only a small fraction of the total workforce. For example, MicrosoftMSFT
(from The New York Times article, “Microsoft to Lay Off 10,000 Workers as It Looks to Trim Costs“):

“The company will lay off 10,000 workers, Satya Nadella, Microsoft’s chief executive, said, as it looks to trim costs amid economic uncertainty and to refocus on priorities such as artificial intelligence.

“Microsoft employed about 221,000 workers as of the end of June, and the cuts amount to less than 5 percent of its global work force.”

However, that defense, while seemingly diminishing the action, overlooks the cumulative negative effects from laying off a town-sized population of 10,000. Moreover, the dual reasons seem contradictory. “Refocus” means shifting resources unless it includes shutting down some large, unprofitable areas. “Trimming” means cutting costs everywhere, like the classic directive to all departments to cut positions by, say, 5%. That would better explain 10,000 getting pink slips, but it would also be a warning to Microsoft shareholders.

Question #3 – Why all the me-too layoffs?

“Refocusing” is hardly a general reason, so “economic uncertainty” looks like the best answer. If that is the primary reason, then investors should view these multiple layoffs as a stock market warning sign.

But there is an offshoot from this question: Is there a hidden answer – an ulterior motive not discussed? In today’s age, such questions get a “yes” answer, such as the one in this Inc. magazine article, “Is This the Real Reason GoogleGOOG
, AmazonAMZN
, Facebook [Meta], and Microsoft Are Having Layoffs?”:

“Is the current wave of big-tech layoffs really intended as a way of weakening tech employees’ confidence and gaining a stronger negotiating position for their employers? That’s what several tech industry observers believe, among them John Cook, co-founder of GeekWire, and Vice reporter Maxwell Strachan.

“Google, Amazon, Facebook, and Microsoft are laying off a total of 51,000 employees. Each company says it is taking this very difficult step out of necessity and with tremendous regret. The reasons given in each case are the same, almost word-for-word. Each is some version of this: In the wake of the pandemic, we experienced growth in demand and increased our workforce to fulfill that demand. With a slowing economy and shifting market, we now see that we mistakenly hired too many, and we must correct that by letting some people go.

“What if all that is a big, fat lie? What if the real reason for the layoffs is that big tech company leaders, weary of catering to the whims of ever-more-sought-after engineers and data scientists, simply decided that they’d had enough, and that they would put these techies in their place by making them fear for their jobs?”

Yes, that is a version of conspiracy theory. It’s importance isn’t feasibility, but simply its existence. It’s why question #3 needs an understandable and reasonable answer.

Question #4 – What comes after these layoffs?

It’s hard to envision good times returning simply because of the layoffs. Likely each layoff is just the first step in reshaping a company for what comes next. As to “refocusing,” companies will probably say less about futuristic growth visions and more about fundamental strengths (like sound financials, increased productivity, stable profit margin, desirable earnings, and dividend growth). To make that shift, expect more cutbacks, retrenchments and company actions like spinoffs and selloffs.

Then, there is the one, big, important and meaningful step: Building a new foundation for growth. Doing so nearly always means a throwaway quarter of negative actions, meaning financial expensing, write-downs, write-offs and potential expense funding. The goal is to clean house by removing any excesses still on the books.

Importantly, analysts and fund managers understand and welcome such rare times. They know that once the ugly quarter passes, the future quarters could be very attractive.

The bottom line – Don’t rush this rebuilding period

We’re still enveloped in a fog of uncertainty and risk, separate from the Fed’s actions. Inflation is settling down and interest rates are meaningful, albeit still below the inflation rate. Most of the 2021-22 stock fads have reversed, but remnants linger. Many stock investors still mistakenly expect a return to the previous growth environment. Bond investors are relearning that somewhat higher long-term yields require much lower bond prices. Next to learn is how credit risk can hurt, even in a stable bond market. Then, there are all the lessons being learned about the good times’ contrivances designed to look safe while producing an outsized return – For example, leveraged anythings, derivatives of all sorts, illiquid assets, and warrants/rights.

So, think cash first, with money market funds now paying a “huge” return of over 4%, likely on its way up to about 5%. Yes, that’s still below the CPI inflation rate, but it’s a lot closer than that near-0% yield was a year ago. More importantly, that 5% yield returns the money market back to normal – a condition not seen since 2007 – 15 years ago! Expect very good things from the deserved, equitable status for the holders of those $trillions of short-term investments. They are once again receiving their earned income flow paid by the users of their capital (borrowers of all sorts, particularly the U.S. Government and major corporations) – and all that income will find its way into the financial system and the economy.