What The Heck Is Wrong with Big Tech?

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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. Apple 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 and the universal remedy of acquisition accounting, 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. It’s an addition.

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 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.

When Goldman Sachs downgraded all global stocks, it gave a peculiar reason. Read…. How Bad Can The Junk-Bond Sell-Off Get? So Bad It’ll Take Down Stocks

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  10 comments for “What The Heck Is Wrong with Big Tech?

  1. Aug 2, 2014 at 2:27 am

    Thank you for highlighting the dismal state of tech. If IBM, HP or Microsoft were an SME laying off workers at the percentages they are, they would be excoriated for being completely incompetent at business. Yet, they can make sweeping, unthinking changes, increase C-level executive pay (I wouldn’t trust Nadella, Whitman or Rometty to collect my street’s rubbish in any kind of coherent fashion), and the stock market rewards them. It’s diabolical.

    (ex-HP, ex-Oracle, ex-IBM)

  2. Mark B.
    Aug 2, 2014 at 9:20 am

    Be interesting to see what happens as the social media / dotcom v2 companies start failing. VC’s provide capital to the social media startups who in turn rent server time from a cloud service provider who buys their equipment from HP, Dell, etc. Once the VC free ride ends, very few of these companies will have enough revenue to keep renting server time and the whole chain will collapse. Maybe that’s already happening…

  3. CrazyCooter
    Aug 2, 2014 at 9:38 am

    This has been a long time coming and will go much, much deeper than most people (even those in IT) realize. First, a very old article from I, Cringely …

    “The truth is that IT has led to many changes in the way we do business, and some of those changes are obvious improvements, but the success story is dragged down by the heaviness of the capital and labor investment required. If we save a head in accounting by adding a head in IT, are there any real savings? Certainly, there is in the eyes of IT management, because their power is enhanced by this scenario. Going beyond that, I’d say for the most part they don’t really care. Considered in terms of Total Cost of Ownership, IT in large organizations is a train wreck. ”

    SOURCE:
    http://www.pbs.org/cringely/pulpit/2003/pulpit_20030807_000781.html

    What he is getting at, although the topic of the post is largely unrelated, is that IT in most corporations is highly inefficient, at least so far as doing as much as a group can with minimal resources. His point is simply that IT management is more, no less, powerful as a function of budget and headcount and thus incentives IT management to bias towards bloat.

    Applied computer science is a K-wave that is rather long in the tooth and will continue its “commoditization” of lower margins and lower prices. Folks in IT are sort of like the machinists in the 60s; good jobs, good pay, but the future for them is all downhill. Companies who sell IT products are re-selling the same product with few if any new features. Don’t believe me? How many versions of MS Office have you (or your company) purchased since 1998 when Word did everything I ever needed it to do? Ever ask why you don’t “own” that capital if the version from 1998 was just fine? Is that money really well spent?

    This is precisely the reason companies in tech are desperate to get their customers “on the cloud” as this is a rentier model where companies can’t directly own their capital (i.e. technology, processing, software, etc). The smartest thing any company can do right now is to carefully manage their IT department and get all the important software/etc in-house.

    In an increasingly deflationary environment, companies are going to start looking for ways to “own” their IT capital rather than renting it. And there are lots of places to find inefficiency. This will be driven by a generation of CEOs that grew up with PCs instead of roller skates and who never dictated to a secretary in their lives.

    Don’t get me wrong, IT will be around forever, but it won’t be the cash cow of the good old days and much, much more will be done with far fewer bodies.

    This process will take a decade to play out …

    Regards,

    Cooter

    • Aug 2, 2014 at 6:16 pm

      I know I’m punching above my weight here :), but thought that some clarification from the IT trenches might be in line.

      Cooter, you’re conflating two different scenarios: one is IT in non-IT companies and the other is the operation of pure tech companies. Cringely is certainly talking about the former when he says that “IT in large organizations is a train wreck”, but this post is about the latter, the tech companies themselves. The scenario is different in IT companies, as opposed to IT within other-industry companies, and this distinction is a critical one to point out.

      “Folks in IT are sort of like the machinists in the 60s; good jobs, good pay, but the future for them is all downhill.”

      You are reaching the right conclusion but with the wrong reasoning. The future is downhill because the knowledge work is being farmed out to less-skilled workers gaming the system. It began with India which, to everyone’s delight (cry me a river, Bangalore), is now getting eclipsed by Romanians, Egyptians and Vietnamese, to name three. Here’s the problem: the so-called developers in the Third World are not as skilled as their First World counterparts. In addition, I’m personally sick of seeing management chums with degrees in Music and History getting positions as technical IT consultants. (This is a veritable plague situation in Australian IT.) Both these elements add to the rot. This is tangent to the main discussion, but an important element.

      “This is precisely the reason companies in tech are desperate to get their customers “on the cloud” as this is a rentier model where companies can’t directly own their capital (i.e. technology, processing, software, etc).”

      False argument as no large company worth its salt owns any of that stuff NOW! The hardware is usually leased from HP/Fujitsu/Cisco/etc., the software is licensed from SAP/Oracle/etc. and is of inferior quality. Everything is locked down by SLAs (Service Level Agreements) which *ensure* that the company owns as little as possible so it can scream blue murder *to someone else* the moment someone in DE (Data Entry) chips a fingernail. Even government departments operate in this fashion and did so before the much-hyped “cloud” (distributed-database thin clients) was touted as a universal panacea.

      The cloud is a boon for IT companies because (a) they can control the entire environment, from metal to middleware, without having pesky companies suddenly decide to lease from a “non-preferred” partner, and (b) the profit margin is greater. This was what was behind Oracle’s acquisition of Sun. They didn’t give a shit about the software, they just wanted a machine-to-cloud silo that no customer could escape.

      I have personally advised a client to move all his software development in-house because the quality of database software and middleware integration being released/developed by one of my ex-employers and a third-party integrator was woeful then and is in even worse straits now. I know he wouldn’t have done it because of accounting/payroll considerations.

      “In an increasingly deflationary environment, companies are going to start looking for ways to “own” their IT capital rather than renting it.”

      We have gone through deflationary cycles before and this has not happened. Again, I think you may be right, but for different reasons. (1) The ability for a company to control its own software quality. (2) Fear of having proprietary information datamined to death. Neither have to do with deflation and are far more compelling reasons for moving from a rentier model which, more and more, is resembling an iron maiden.

      In any case, what Wolf is writing about is not IT-within-a-company but IT-companies themselves, which is a different problem.

      Kaz!

  4. Petunia
    Aug 2, 2014 at 3:58 pm

    I think the takeover binge is a drive, by the investors, to steer dollars to a smaller set of IT providers. This is why they close companies quickly after buying them. They never intend to run these units for profit, they are eliminating not just competitors in their sectors, but they are also capturing all the available capital expenditure.

  5. Joe
    Aug 3, 2014 at 2:21 am

    Going at this rate, I don’t think HP can survive for the next 7 years. The big dinosaurs are dying fast. They never learn, change and adapt, always decade behind.

  6. Aug 3, 2014 at 7:46 am

    And what about big tech’s push for even more cheap foreign labor? How does a ‘shortage’ of workers with ‘skills’ square up with slashing payrolls?

    The reason is simple. “Acquisition accounting” is indeed one maneuver to boost profits, but if you can replace people making 40 dollars an hour with people making five bucks an hour, well, that helps the bottom line as well – and that’s automatic and guaranteed. That’s why big tech is so hot for immigration “reform.” It will further flood the market for labor, drive wages down across the board (skilled AND unskilled alike), and make the CEOs boatloads of cash.

    Of course this will impoverish Americans who work for a living, and eventually crush the United States as a standpoint of scientific and engineering creativity:

    http://globuspallidusxi.blogspot.com/2014/02/yes-there-can-be-too-many-smart-people.html

    But hey, Gates and Zuckerberg will get even richer, so that’s OK!

    • Vendetta
      Aug 4, 2014 at 6:17 am

      Exactly. I watched all of it firsthand around the turn of the century. Good and highly skilled programmers, Americans, forced to train the ‘other country’ contractors.. the voila’ a ‘downturn’ in the economy… all the American programmers fired (oh.. I mean laid off) and the company shifts ‘certain’ operations to its bangawhatever location and the CEO and his crony’s cash out the next 100,000 batch of nickel a share exercise cost stock options at the inflated stock price

    • Petunia
      Aug 4, 2014 at 12:59 pm

      Most of the programmers from India, Egypt, the third world in general have very inferior educations in computer science compared to American graduates. Many of the schools they attend overseas are questionable as universities and I would consider most of them to be diploma mills. They are hired because they are cheap and disposable. These people are also mainly doing software maintenance and not any real new development because they can’t.

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