What The Heck Is Wrong with Tech?

By Wolf Richter: Tech companies – along with the rest of corporate America – have been on a white-hot acquisition binge, swallowing anything that isn’t nailed down, from startups with a few employees to large corporations, even startups buying each other. For them, money is growing on trees, debt is nearly free, and stockholders are no longer paying attention to anything other than silly Wall-Street hype and whatever the Fed might do.

With these acquisitions, they’re hoping to boost their stagnating or declining revenues, acquire new technologies or talent, and then practice “acquisition accounting,” which allows them to announce huge and constantly recurring “one-time, non-cash” write-offs of actual expenses, paid for, or to be paid for, in cash or in stock, related or not to these acquisitions. Acquisition accounting elegantly obscures otherwise dreary results. Analysts fall for it lock, stock, and barrel. Every time.

IBM disclosed 13 “selected acquisitions” in 2013 and so far this year. Among them was cloud-computing startup SoftLayer for which it paid $2 billion. Then IBM scuttled its own cloud-computing products. Microsoft, which kept missing the train on mobile for years, counted among its acquisitions Nokia’s mobile-phone business. When the deal was announced in November, Microsoft promised $600 million in annual cost savings within 18 months. Even Apple, which rarely buys anything, couldn’t restrain itself and bought Beats Music and Beats Electronics in May.

They’ve all been doing it. Some companies more than others. All these acquisitions share one thing in common: the promise of “efficiencies and synergies.” Hence, layoffs. With each announcement of axing thousands of people – thousands are definitely better than hundreds – the stock price goes up.

The numbers are starting to add up. Among the biggest job cuts so far this year: 18,000 announced by Microsoft, over three times larger than the largest bout of layoffs in its history. The new CEO, Satya Nadellais, is trying to put his stamp on the company. It surpassed HP’s earlier announcement of 16,000 job cuts, part of its endless series of job cuts. Intel announced 5,350 job cuts. TI, another serial job cutter, 1,100, Dell 1,000, EMC 1,000….

Some of this might be routine repositioning: tech companies laying off at one end and hiring at another. And there were reports that computer makers have been hit hard by the long-awaited death of the PC. However, these reports were, according to Intel, greatly exaggerated.

Yet it’s beyond routine.

The announced layoffs over the first seven months this year are hefty. The computer industry, according to the Challenger Job Cut Report, is axing 48,361 people; the electronics industry 9,056 people. The telecom industry 13,910 people. In total, during these seven months, the Tech Sector told eager Wall Street analysts that it would boot 71,327 people. That’s up 127% from the same period a year ago!

If job cuts in the tech sector continue at the current rate for the rest of the year, it would be the worst year since 2009, the crisis year when panicked companies around the country were dumping people faster than anyone could count. That year of soaring unemployment, the tech sector announced 174,629 job cuts.

The record year? 2001. The year of the collapse of the dotcom bubble: 695,581 job cuts just in the tech sector.

The Challenger report blamed Microsoft and HP – they were “slow to react to the shift from PCs to mobile and simply do not want to get caught flat-footed again,” the report suggested. They “had to flatten the bureaucracy and foster a more entrepreneurial approach to decision making.”

OK, I get that. Tech mastodons like HP say that sort of thing at every round of job cuts, of which HP has engineered so many I’ve lost count. They always want to “flatten the bureaucracy,” and they always talk about “more entrepreneurial” something or other. But it never happens. Problems at HP and companies like it persist. So they try to fix their problems via acquisitions, which then trigger more layoffs and create more problems that then need to be fixed – or at least hidden - via more acquisitions. You get the drift.

But this time it’s different. In the first half, global M&A volume soared 75% to $1.75 trillion, involving 17,698 deals! At this rate, 35,000 companies will be swallowed by year end. The all-time record was set in 2007 with $2.28 trillion in deals. This year is going to get close. And after that wave of acquisitions in 2007 and 2008? Companies were seeking efficiencies and synergies. They were trying to “flatten the bureaucracy,” and be “more entrepreneurial.” Hence job cuts. Which turned into the great jobs crisis of 2009.

Why haven’t the weekly unemployment claims budged much off their lows?

Delays. Microsoft agreed to buy Nokia’s unit in November 2013. It took a while to complete the deal. Then it took a while to sort out how to decide on the magic number and how to present it most effectively to Wall Street for maximum impact on the stock price. In Microsoft’s case, that happened just about 9 months after the acquisition announcement. At the time, it said the savings would be implemented within 18 months. So, we’re halfway there.

Once the job cuts have been announced, the very bureaucracy these companies are trying to “flatten” takes over. The process requires time and a lot of money before people are actually pushed out the door. Some of them will find jobs right away and won’t file for unemployment compensation. But they’re filling holes someone else without a job could have filled otherwise. And those who don’t already have a job lined up will then file for unemployment compensation. That’s when the weekly unemployment claims will start creeping up.

At Microsoft, this might happen late this year and early next year. Other companies might be faster or slower in executing their “synergies.” But tech tends to be a harbinger for a syndrome that’s caused by money that’s growing on trees, debt that is nearly free, and stockholders who are no longer paying attention to anything but hype and the Fed. And every time this ended in the past, it ended in tears.

Kicking back with a brewski from a local craft brewer can make all this insanity and even the Fed’s zany capers go down more smoothly. American craft brewers are kicking butt as the world watches with rapt attention. But craft-beer paradise California has some issues.

Source 

X art by WB7