Microsoft Tallies True Costs of M&A Boom: Layoffs, Write-Offs, Shut-Downs, Economic Decline

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”

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  13 comments for “Microsoft Tallies True Costs of M&A Boom: Layoffs, Write-Offs, Shut-Downs, Economic Decline

  1. Mary
    Jul 9, 2015 at 1:41 am

    Actually, Wolf, mergers can really make businesses efficient and that is precisely the reason people become redundant. Creating jobs is not creating efficiency, it is the very opposite in fact. Efficiency creates newer and better services or products, or cheaper.

    Of course, Microsoft is not the leader anymore in the technology landscape like it used to be. A competition with Apple or Google etc. is a different ballgame than a competition with IBM. That is part of the reason.

    • Petunia
      Jul 9, 2015 at 9:03 am

      Mergers are a public admission that a company can no longer grow and must buy its growth. I have been watching merger mania since the Drexel Milken days and the only benefit is that a small group of people got very rich. Everybody else connected to the deals got poorer.

    • CrazyCooter
      Jul 9, 2015 at 9:48 am

      I hope readers here have enough perspective to realize that computing (broadly speaking) is a K-Wave that is very long in the tooth and is well into the commoditization phase. There was a time in the US when IBM ruled the technology market with a big stick and one of the best blue collar jobs in the US was being a machinist (one working parent, house, two cars, two kids – no problem). How is that panning out today? AT&T used to be the big dog … remember the big phone break up?

      When a new technology comes along, not the piddly stuff, but things like the semi-conductor, steam engines, telegraph/phone, radio/tv, etc, they expand to literally every house/corner in the economy. I loathe the word disruptive in this context but it is applicable. The growth and ramp up is epic … its a long running sustainable boom – a real boom that produces real value and provides real jobs. But we live in a finite world and only need so many phones, PCs, cars, trains, and shoes before the marginal value of the next one isn’t worth it. When the innovation dies down, the cycle starts to commoditize because everyone is selling more or less the same thing with minor differences, so price becomes a bigger and bigger factor.

      Hold this thought in your mind and think when the last time you saw an application that REALLY changed how you work. Office programs? Cell phone? Email? Hello 90s? All the stuff today is just incremental experiments with existing ideas that don’t have a “big” value proposition … just small ones.

      Folks, computing as a growth industry is done, just like phones expanded rapidly and then commoditised, the same with cars, and steam engines and rail roads. I personally work in IT and this industry is full of idiots who think they are entitled to a life of comfort and high salary/benefit jobs who have no idea that they won’t be needed in 10 years unless they are uniquely talented/experienced which isn’t the norm.

      And trust me, it is no fun being in a market full of laid off tech workers when you work in tech. But now we are back to the “don’t buy a house” discussions and getting off topic …

      In closing I like to highlight that many of the CEOs out there grew up on roller skates and dictated to secretaries (and smoked on business flights). They don’t understand all this technology stuff, but they are the boss so they play along and believe all sorts of dumb shit and don’t admit when they screwed up for perception/political reasons. However as the younger cohorts move in, they DO understand it and I can say from first hand personal experience that many IT dollars in corporate budgets are absolute waste.

      This will change over time – this is the commoditization where solutions that require 10 staff internally will be replaced with solutions that require half (or less) with a vendor solution. Some company out there somewhere already figured out how to do it and can rent that solution cheaper than you can build/maintain your own. All it takes is management that insists on efficiency and is willing to roll up their sleeves and do the hard work.

      There is a reason the tech industry is panicing into “the cloud” because it guarantees a revenue stream and you can hold the customers data hostage … because if they don’t they are going to be squeezed into being lowest price or out of business.

      Regards,

      Cooter

      • CJA
        Jul 14, 2015 at 4:27 pm

        Hmm. Very interesting points Cooter.

  2. Mike R
    Jul 9, 2015 at 7:10 am

    The current wave of mergers and acqs is taking place in an overall economy that has too much supply for demand across many economic sectors. Largely, the “losers” are selling out to the “winners” and letting the “winners” do the nasty work of layoffs and closing facilities. That said, I do not like what I see not because of the layoffs (that is bad enough) but because of the consolidation of business lines that is leading to only a few players in many industries. Essentially governments are sitting on their hands and letting the monopolization of industries occur. Probably because the “winners” have them in their hip pocket and also because governments are fully incompetent/unable now to assert much control over the economy (shellshocked). Recently, the Obama administration has pushed back on some mergers (good) such at Time Warner/Charter and investigating air ticket collusion, but to unwind this mess will take real leadership and I’m afraid there aren’t enough “unbought” politicians to make it happen.

    If you think my thesis is off, look around. The ‘industry’ I have been working in (fire protection design) has recently ‘consolidated’ to the extent that 8 medium sized firms are now under one roof. These are not public companies but you see my point. Many owners just want to sell out and let someone else run it, but rest assured, there is not enough work for the combined companies and there will be cutbacks….but also price collusion in a sense if they are the only game in town now.

    • Petunia
      Jul 9, 2015 at 9:05 am

      Totally agree.

  3. ERG
    Jul 9, 2015 at 7:57 am

    I dunno, Mary. It seems to me the merger itself it what causes the redundancies. Creating jobs is the soul of capitalism done right. Improved productivity is where efficiencies come in and it is a lot more complicated than simply reducing staff levels which is something any idiot can – and often does – do.

  4. Julian the Apostate
    Jul 9, 2015 at 8:34 am

    Unfortunately consolidation is the name of the game, in all of business, not just tech. Only the largest companies can weather the tsunami of regulations and controls from the looters in Washington and from other peoples’ states around the globe. And you have to be in a business that is currently viewed to be “in the public good”. There are no asbestos companies left, and coal is now in the crosshairs and will be extinct before long, no amount of consolidation will save an industry deemed an enemy “of the public good”. The market is tanking? Suspend trading and put a gun to the heads of the short sellers. What was perfectly legal yesterday will be treasonous tomorrow. Laws are of no use unless the right people break them. And the ‘right people’ change from day to day on the whim of some bureaucrat whose mind intersects reality at no point.

  5. Vespa P200E
    Jul 9, 2015 at 9:40 am

    I used to work at MSFT and found it to be politically charged, type A intensity and often intentionally staged conflicts with 2 or more teams given same goals driven by dog eat dog where 1 of my colleague often said we eat our young here.

    Ballmer is truly is a schmuck as I will never forget how he acted like madman on stage at the all company meeting held at Safeco field in 2001 or 2. He ran across the stage jumping and yelling like he was on multiple drugs and I thought he was going to drop dead while he was hyperventilating. I though geesh we have this kind of idiot to replace Bill as CEO?

    Roll forward and Ballmer’s last idiotic swan song was buying NOK. That’s really funny as I still have a bright orange cap I got from MSFT in 2003 which says “Say NO to Nokia” from PocketPC group who was spinning its wheels on adopting joke PocketPC OS on the phone (guess that was the 1st smartphone?).

    • CrazyCooter
      Jul 9, 2015 at 9:56 am

      Developers! Developers! Developers!

      Hahahha … good times …

      Regards,

      Cooter

    • fledermaus
      Jul 9, 2015 at 11:32 am

      Well Ballmer won’t have that MSFT money for long. Last I heard he was a big investor in Mark Penn’s new hedge fund. Yes, THAT Mark Penn, the Clinton campaign manager that didn’t know how primary delegates were awarded.

  6. ERG
    Jul 9, 2015 at 11:19 am

    Nice post, Cooter. I see the same at my company. They have rushed to make us an “IT Service” firm not realizing that it has already Jumped The Shark. Our office has gone from looking like a retirement home to a high school in five short years. Now our ‘talent pool’ is a mile wide and a quarter inch deep instead of the other way around. When something requiring more experience than a couple years out of college comes along, it’s like watching deer stuck in the headlights of an oncoming car.

    Our illustrious CEO has also gone in for M&As (gotta get that bonus!) and the first thing that happened with one of them was the retirement of their CEO, leaving a hole nobody can fill because the nature of the work is so arcane. Oh and I almost forgot the market for that service is: [1] highly competitive, [2] highly price sensitive, and um pretty much [3] dead as a doornail.

    So far, it has been like watching a toilet overflow. You really don’t want to look, but you cant help yourself.

  7. Julian the Apostate
    Jul 10, 2015 at 6:50 am

    “Now our talent pool is a mile wide and a quarter inch deep…” LOL ERG what a perfect reflection of the internet!

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