A friend of mine who has been CFO of a couple of Fortune 500 companies once told me that layoffs always drive a stock price up, and that it's also one of the single biggest proofs that Wall Street analysts have no idea how to run a real business.
He explained that any company who could shed a massive amount of its workforce within a year, or all at once, is a red flag for massive internal problems. At the time we had this discussion, he was the CFO of a company that had over 30,000 employees globally.
His thinking was that the same principals that small companies use (not hiring too quickly, etc.) should be scaled up regardless of the company size. You either need people or you don't. You don't hire too fast simply because you are experiencing rapid revenue growth, because revenues do not grow unabated. You hire as slowly as you can, so that when recessions hit or market forces change, you don't suddenly have 3 or 4 times the staff you need. His thinking (which I agree with) is that since those people worked extra hard to cover the work when times were booming, you don't turn around and lay them off just because things slow for a couple of years.
Those people worked hard for the company because they are good employees; he saw it as more important to have good employees on hand when things ramped up again rather than just cut them loose and hope he could get more good employees later.
Since that discussion, he's gone on to two more companies, leading one through an IPO as the CEO. All of his companies have operated like gangbusters - he comes in, revenues go through the roof, debt gets paid down and he's NEVER LAID ANYONE OFF. In the meantime, in his work history, he's been through 3 IPOS (two as CFO, one as CEO) and I don't know how much he made personally on each I do know that he cleared $41 million in a single day on one of them.
This is in complete opposition to what I've heard from several other CEOs, who tell me 'labor is your most controllable expense'. Yet, none of their companies (some also on the NYSE or NASDAQ) have performed anywhere near what my friend's has.
I think he's right. Wall Street is full of guys who have no actual experience running a business. They see layoffs as 'cleaning house' and 'cutting expenses' but the reality is that while that can be true, it more often is a harbinger that the company is not well run.
> "it's also one of the single biggest proofs that Wall Street analysts have no idea how to run a real business."
While it sounds like your friend definitely knows how to run a real business, he/you may want to re-asses Wall Street's real business: it isn't "running companies", it isn't "building value" and it sure isn't "giving away solid analysis for free".
They make money off trade-activity that generates short-term returns.
The sell trades, not stocks. Not unlike eBay. They can and do profit from irrational/emotional behavior and they have no qualms about designing their business to fuel and leverage those behaviors for increased returns.
If 2007 taught us anything, it should be that Wall Street is more than happy to tell you whatever you need to hear to generate predictable trades -- more than happy to tell business news channels whatever will generate predictable trades -- even those they know those trades to be bad and foolish to the extent that they personally bet against them.
Your friend is right, but Wall Street won't listen to him because it means fewer quantifiable metrics for Wall Street to latch onto to evaluate (or pretend to evaluate) how well the company is doing. The analysts would then have to evaluate based upon actually understanding the company in depth, meaning they have to invest more hours into analysis and cover fewer companies, and reduce their own effectiveness/profitability. Not understanding the business at a deep level in this situation is a feature for Wall Street, not a bug. "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
imho, the biggest cause of this kind of thing is lack of sufficient strategic direction, and delegation with accountability to middle management of initiatives that are in line with that direction. When middle/lower managers aren't in lockstep with the CEO's/Board's strategy, confusion, misdirection and unnecessary politics ensue, and the lowest possible level workers suffer most.
Counter Nadella's communications over the last few weeks with what Larry Page said/wrote when he took over from Eric Schmidt. Even though Google pursues hundreds of interesting initiatives of varying revenue importance, it appears they have a coherent strategy (internally, at least) and have been making appropriate decisions to further it, even when those decisions are sometimes indecipherable to external viewers.
He explained that any company who could shed a massive amount of its workforce within a year, or all at once, is a red flag for massive internal problems. At the time we had this discussion, he was the CFO of a company that had over 30,000 employees globally.
His thinking was that the same principals that small companies use (not hiring too quickly, etc.) should be scaled up regardless of the company size. You either need people or you don't. You don't hire too fast simply because you are experiencing rapid revenue growth, because revenues do not grow unabated. You hire as slowly as you can, so that when recessions hit or market forces change, you don't suddenly have 3 or 4 times the staff you need. His thinking (which I agree with) is that since those people worked extra hard to cover the work when times were booming, you don't turn around and lay them off just because things slow for a couple of years.
Those people worked hard for the company because they are good employees; he saw it as more important to have good employees on hand when things ramped up again rather than just cut them loose and hope he could get more good employees later.
Since that discussion, he's gone on to two more companies, leading one through an IPO as the CEO. All of his companies have operated like gangbusters - he comes in, revenues go through the roof, debt gets paid down and he's NEVER LAID ANYONE OFF. In the meantime, in his work history, he's been through 3 IPOS (two as CFO, one as CEO) and I don't know how much he made personally on each I do know that he cleared $41 million in a single day on one of them.
This is in complete opposition to what I've heard from several other CEOs, who tell me 'labor is your most controllable expense'. Yet, none of their companies (some also on the NYSE or NASDAQ) have performed anywhere near what my friend's has.
I think he's right. Wall Street is full of guys who have no actual experience running a business. They see layoffs as 'cleaning house' and 'cutting expenses' but the reality is that while that can be true, it more often is a harbinger that the company is not well run.