This page has been archived and commenting is disabled.
Microsoft Tallies True Costs of M&A Boom: Layoffs, Write-Offs, Shut-Downs, Economic Decline
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
As the M&A boom in the US explodes from record to record, with one mega-merger succeeding another, Microsoft clarified on Wednesday just how much all this fun costs down the road, in jobs and dollars: relating mostly to its acquisition of Nokia, it announced a second wave of layoffs, write-offs, and shut-downs.
Share repurchases, M&A, layoffs, and cost-cutting are easier to make happen for a CEO than inventing things and boosting sales organically, which is really hard.
Companies call the dizzying costs of acquisitions, paid for with cash and/or stock, “non-cash charges” to make them appear irrelevant. Analysts feed out of their hands and eat it up. To justify acquisitions, CEOs and analysts sprinkle their pronouncements with terms like “efficiencies” and “synergies” that are euphemisms for cost-cutting, destruction of productive capacity, and layoffs.
In September 2013, Microsoft acquired Nokia’s mobile-phone business and patents. Nokia was junk-rated. Its market share was collapsing. It had lost over $4 billion in the prior year. But its marginalized smartphones were using the Windows Phones operating system that no one else of consequence was using. And that was a big deal.
Microsoft paid $7.2 billion. To make the deal sound palatable, it promised $600 million in annual cost savings – the efficiencies and synergies – within 18 months. That was CEO Steve Ballmer’s doing.
In February 2014, Satya Nadella was anointed CEO. On July 17, the meaning of annual cost savings became clear: the company would axe 18,000 people and take a $1.6 billion “non-cash” charge. And in premarket trading after the announcement of the job cuts, shares rose to a 14-year high. Nadella was putting his stamp on the company.
Almost exactly a year later, this Wednesday, he sent an email to employees to “update” them “on decisions impacting our phone business….”
Microsoft would axe another 7,800 people globally, nearly 7% of its already trimmed-down workforce, “primarily in our phone business,” as Nadella wrote. He expected it to happen “over the next several months.”
And a huge pile of money has gone up in smoke:
Today, we announced a fundamental restructuring of our phone business. As a result, the company will take an impairment charge of approximately $7.6 billion related to assets associated with the acquisition of the Nokia Devices and Services business in addition to a restructuring charge of approximately $750 million to $850 million.
In an email to employees in late June, quoted by the New York Times, Nadella tried to get his employees all excited about the future by warning them that Microsoft would have to “make some tough choices in areas where things are not working and solve hard problems in ways that drive customer value.” People could imagine what was coming. And it wasn’t reassuring.
Now things would change, according to his email on Wednesday, in impeccable corporate speak:
We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family.
In the near term, we will run a more effective phone portfolio, with better products and speed to market given the recently formed Windows and Devices Group. We plan to narrow our focus to three customer segments where we can make unique contributions and where we can differentiate through the combination of our hardware and software. We’ll bring business customers the best management, security, and productivity experiences they need; value phone buyers the communications services they want; and Windows fans the flagship devices they’ll love.
Beyond the corporate speak? The “standalone” business Microsoft bought for $7.2 billion a year and a half ago would essentially be shut down. The costs are ballooning. The tab for the Nokia acquisition and some other moves, with both waves combined, now lists 25,800 jobs axed and $10 billion down the drain.
That’s how M&As work. They’re the ultimate form of financial engineering. Rarely does anything good come of them that moves the economy or even the company forward. Instead, they entail layoffs, write-offs, shut-downs, and economic decline. In some cases, they generate oligopolies that then can exert pricing power and stifle innovation, which further degrade the economy.
But there are some benefits. The executives of the acquired companies get a fancy package. The executives of the acquirer fatten up their corporations, and thus their own fancy package. Acquisitions are great deals for insiders and the stockholders of the acquired companies. And Wall Street loves the fees it can extract from them. But somebody has got to pay for it.
As in Microsoft’s case, there is a long lag between the acquisition announcement and when the “efficiencies and synergies” start wreaking havoc on the broader economy.
Despite the acquisition, Windows Phones has a miserable 3% or so of the smartphone market, not even an also-ran next to Apple’s iOS and Google’s Android. Former Nokia CEO Stephen Elop, who transferred to Microsoft with Nokia, is already gone, after having been richly rewarded via, among other methods, the acquisition. And Ballmer retired shortly after the acquisition and bought the Los Angeles Clippers for $2 billion.
The current M&A Boom, the biggest ever, is far bigger than the last two, and they both ended in crashes. Read… “Everyone Is Wondering When the Volcano Will Erupt”
»
- advertisements -
Agree Foxit and Notepad++, these with excel are the xtree gold apps of windows. Windows7 was a massive disappointment, after the simplicity, control and speed XP provided. I'm still stunned what a complete slug of an OS Windows7 was on half decent hardware. Every app became far slower, even the older small ones. I thought a 64 bit OS was supposed to pump bits faster! NOT! Windows8 = MS jump the shark.
The problem isn't M&A. It's centrally-planned interest rates.
Let's face reality: some businesses die and are meant to be shut down. The problem is that artificially-low rates expands the number of companies that can be taken over with cheap debt. So instead of only the most broken businesses being broken up and dismantled, some marginal ones also get the axe because money is so plentiful and cheap to borrow.
M&A is a great value-creation tool, and tools used in toxic environements only accelerate the value destruction caused by the environs of centrally-planned interest rates.
Don't blame the smartest guys in the room for the stupid policies of the Fed Politburo.
Does "Smartest guys in the room" include those who have the foresight of a blind, deaf, and dumb sloth?? Who only see their compensation and stock increasing, as a sign that they are in that category??
Wouldn't a really smart guy in the room say,
"WHOA!!! Why are we (Aetna) buying Humana???? Both our companies are doing fabulously well, there is no essential need to acquire a perfectly run Health Care company, just to eliminate thousands of jobs.
Let's not let our boredom guide our future, let's get off the golf course, and get back to increasing the number of policy holders, or invent innovative insurance programs, and leave those well paid employees alone so that they can buy our services and products. In fact let's see how we can spin off some of our businesses, creating even more jobs to have more workers as potential customers."
The "smartest guys in the room" should be reserved for the visionaries, the farmers, growers, and expanders of the economy, not those killing it for the sake of a dubious, likely more costly stratagery" that many times fails miserably in the not too long run.
Those guys who seek shrinking a space are more like the George Bushes of the Corporatocracy.
A recent case in point: A highly successful business with a strong regional presence, making good money was approached by a small law firm looking to earn fees for advising smaller businesses to move to Mexico. Savings in labor would amount to 50%, (so the numbers said). The owners said, "no thanks.".
So surprising for a company that paid $400 million for Hotmail.
Its time MSFT's state sanctioned monopoly franchise be terminated for Anti Trust abuse for starters, they license all android hardware device manufacturers.
Chrorme plated dog turds as far as the eye can see. Nokia really wasn't that bad if you compare it to some of the other M&A disasters happening right now......
The classic term Peter Lynch used was "Diworsification".
I miss him. My first investment was with his fund......