Global M&A volume in the first half was the highest since 2007. It was led by the largest corporations, including GE, that borrowed for nearly free thanks to global ZIRP, to load up their balance sheet with spending money. Deal volume in the first half soared 75% to $1.75 trillion, closing in on the record set in 2007 of $2.28 trillion.
What was “notable,” according to Gregg Lemkau, co-head of global M&A at Goldman Sachs, was “the blue-chip nature of the companies who are doing the acquiring.”
What was even more notable was that the Great M&A Frenzy of 2007/2008 was followed by the Great Jobs Crisis that kicked off in earnest in 2009.
Deals are sold to investors on the basis of “creating value” with terms like “efficiencies” and “synergies” – code words for cost cutting and mass-layoffs. M&A jockeys like HP have lost sight of their business model and can only grow revenues, if at all, through endless acquisitions. Followed by layoffs. Sometimes they’re months apart, sometimes years. HP, after 11 quarters in a row of falling revenues, is still announcing waves of layoffs. A friend of mine, who came to HP via an acquisition of course, survived two waves of layoffs before the financial crisis, but was swept up in the third. Countless waves later, HP just announced another 16,000 layoffs on top of the 34,000 it had announced earlier.
Acquisitions, layoffs, and cost-cutting are the simplest things to do for a CEO, as opposed to inventing things and boosting sales organically, which is hard. And analysts eat them up. They call the dizzying expenses “non-cash charges” to be ignored, and they too decorate their pronouncements with “efficiencies” and “synergies.” Hence, a wave of acquisitions is invariably followed by cost-cutting, destruction of productive capacity, and layoffs.
Last September, Microsoft agreed to acquire Nokia’s mobile-phone business and promised $600 million in annual cost savings – the efficiencies and synergies – within 18 months. Now their meaning is becoming clear: “people who asked not to be identified because the plans aren’t public” told Bloomberg that the company is planning what might be the biggest wave of job cuts in its history.
Exact numbers weren’t mentioned, but Microsoft’s largest wave of layoffs happened during the financial crisis when it axed 5,800 people. [Update July 17: the company announced that it would axe 18,000 people and take a $1.6 billion charge; in premarket trading, shares rose to 14-year high.] Satya Nadella, CEO since February, is putting his stamp on the company. Last week, he sent a professionally produced and designed memo to his “team,” the lucky ones who would be able to keep their jobs. It said in 3,000 words that big changes were coming to Microsoft. What it lacked in specifics, it made up for with glitz.
Nothing is off the table in how we think about shifting our culture to deliver on this core strategy. Organizations will change. Mergers and acquisitions will occur. Job responsibilities will evolve. New partnerships will be formed. Tired traditions will be questioned. Our priorities will be adjusted. New skills will be built. New ideas will be heard. New hires will be made. Processes will be simplified.
With this memo, he wanted to “galvanize employees around what our soul is,” he said in a phone interview. That was a warning. But he refused to admit that the company was planning layoffs.
Layoffs are inevitable after acquisitions. Wall Street demands them. They’re used to rationalize the acquisitions in the first place. The lexicon of corporate euphemisms for axing people includes henceforth Nadella’s two gems, “Job responsibilities will evolve,” and “Processes will be simplified.”
A few M&A deals here and there may not have any measurable impact on the global economy though the layoffs still occur a few months or a year or two later. But when corporate mastodons buy each other out and merge with each other in relentless mega-waves, the resulting cost-cutting and layoffs will have an impact. And there have been 17,698 deals in the first half of this year alone!
But the delays between the deal announcement and the moment when employees are actually shown the door can be significant. Deals take time to complete, and nothing can happen until they’re complete. In complex deals, this can stretch to a year. When governments get involved, it can take even longer. Once the deal is complete, employees often stay on for a while. So the time from the peak of the M&A frenzy to rising unemployment claims can be so long that it’s all too easy to obscure the link between them.
Wall Street’s financial engineers and corporate CEOs alike relish brandishing terms like “synergies” and “Job responsibilities will evolve” to dazzle investors with hope and boost stock prices. But they want to make sure that the M&A frenzy that makes them and the players around them so rich doesn’t get blamed for a jobs crisis a year later. And the corporate lapdog media gush about “Merger Monday” and repeat the M&A lingo without pointing to the large-scale job destruction that the estimated 35,000 global deals this year will inevitably entail.
But the frenzy is starting to show up on the Fed’s radar. Chair Janet Yellen poked with her dull needle at bubbles in momentum stocks and leveraged loans, and threatened to end ZIRP sooner, and more rapidly “than currently envisioned.” Which would end the M&A frenzy. Fasten your seatbelts. Read…. Yellen Warns Investors
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.