Market Update 9/1– Layoffs Hitting Finance & Tech
In Brief: We will take a closer look on how layoffs have been affected by the industry, the stock market, and its competitors.
The economic outlook by the time 2022 was about to bring down its curtains was rather uncertain. There were many calls stating that the economy will face a recession. Some were more optimistic, stating that the market may face a soft landing instead.
As 2023 unveils itself, all the outlooks are now at the scrutiny of reality waiting to unfold – and people are getting rather nervous. In light of this, many are preparing for a grim future – or perhaps are already living in one.
Upon fear of looming recession and decreasing profit & market size, many decided to cut down their expenses by cutting down the number of heads they’ll be paying for.
The most recent news to hit the market is when Goldman Sachs (NYSE: GS) reportedly is looking forward to layoff around 3,200 workers from their team. However, this did not come as a surprise, given that the rumors of layoffs looming along Goldman Sachs have been circulating since mid-December last year.
Another reason behind it is expected to be in anticipation of a meeting with investors which is expected to take place in February. With a lesser workforce to pay for, Goldman Sach’s prospect will look more favorable.
Moving a bit into the digital realm of finance, two cryptocurrency exchanges, Huobi and Gate.io were rumored to follow suit with the layoffs.
The rumors regarding Huobi started off at the end of last year when Colin Wu, a journalist, tweeted that Huobi will look to reduce its workforce from 1,200 people to around 600-800 people.
Justin Sun’s Huobi exchange will cancel all year-end bonuses, and will prepare to lay off the team of 1,200 people to 600-800 people, and cut the salaries of senior employees, according to several insiders. Exclusive— Wu Blockchain (@WuBlockchain) December 30, 2022
Huobi’s Chief Executive Officer (CEO), Justin Sun, denied this at first but on January 6th, 2023, it was reported that Huobi themselves informed that they are looking to cut their workforce by 20%. A move that may be due to the current market performance in the crypto realm – low liquidity, anxiety and falling values.
As reported by Defi LLama, there has been an outflow of $123.13 million from Huobi in the span of a week.
As for Gate.io, it was rumoured that the crypto exchange is along the way of laying off about 40% to 50% of its employees, as reported by Colin Wu.
The cryptocurrency exchange Gate started layoffs. The proportion is unknown. Employees said that it is rumored to be 40% to 50%, and the compensation is N+1. Some employees have already begun to withdraw their permissions. Gate responded as "normal optimization". Exclusive— Wu Blockchain (@WuBlockchain) January 6, 2023
It is perhaps already known to many, but the gravity of it makes it still worth mentioning – Amazon (NASDAQ: AMZN) is looking to layoff an estimated 18,000 or more workers, with the Amazon stores and human resources looking to take most of the bullets for this round.
This matter was admitted by Andy Jassy, Amazon’s CEO, in a memo published on January 5th, 2023.
“Today, I wanted to share the outcome of these further reviews, which is the difficult decision to eliminate additional roles. Between the reductions we made in November and the ones we’re sharing today, we plan to eliminate just over 18,000 roles”. – Andrew Jassy, Amazon CEO
According to Andy, the initial plan was to keep it hush-hush, only discussed within those that were affected. However, he decided to have it out in the open upon a leak by one of Amazon’s staff.
“This year’s review has been more difficult given the uncertain economy and that we’ve hired rapidly over the last several years.” – Andy Jassy, Amazon’s CEO
This massive layoff is attributed to the uncertain economy, paired with Amazon’s rapid hiring throughout recent years. It was believed that Amazon created 500,000 new jobs in the year 2020 alone.
Salesforce, a customer relationship management platform, on January 4th, 2023, reportedly laid off 8,000 workers. However, it may not be the end of it since co-CEO Marc Benioff reportedly hinted towards further layoffs which he attributed to lower productivity. This comes after salesforce reports slowing revenue growth.
Socure, a tech company focusing on identity verification technologies laid off 104 employees, which sums up to around 19% of its total workforce.
Attentive, a private company whose product revolves around e-commerce, reportedly is looking at a 15% layoff, following a few other e-commerce companies such as Stitch Fix (NASDAQ: SFIX) with 20% layoffs and Everlane with 17% layoffs.
It is perhaps important to not leave out our honorary mention of Twitter and Meta which in 2022 have approximately laid off around 14,700 employees.
Company layoffs, and why should we be worried?
Layoffs leave people without jobs, requiring them to find alternative sources of income. It is generally considered a sign of distress for a company when employees are laid off, with the perception that the company is trying to save money that it cannot afford to pay its employees.
Facebook parent Meta announced its plan to cut off thousands of jobs beginning in November 2022. Following suit, Apple Inc, Alphabet Inc, Google, and Microsoft Corp also either freeze their hiring process or majored laying off which mostly occurs in sales and marketing departments.
According to Stanford Graduate School of Business Professor Jeffrey Pfeffer, the tech industry’s workforce reductions are largely due to “social contagion.”
Positive in distress
There is no doubt that layoffs cause economic pain to employees and their households. Additionally, layoffs are also harmful to the company’s well-being. It will become apparent that they are not doing layoffs when everyone does layoffs and their board and shareholders start asking why.
Meanwhile, from an investor’s perspective, layoffs are generally looked at positively since they represent a reduction in expenses and an increase in profits.
Meta layoff news was announced by Mark Zuckerburg through their website on November 9, 2022. Meta’s stock price rose 3.7% after the report and Nasdaq 100 was up 0.6% on next following Monday.
Amazon Inc., which laid off more than 18000 employees via Amazon blog on January 5, 2023, appears to be following the same pattern. Amazon’s stock price dropped a few minutes before closing on January 5 as well as for 50 minutes on January 6 2023 before it rose up to 3.04%.
Layoff and its long-term impact
Layoffs do not often increase stock prices, especially in the long run. Layoffs can signal that a company is having difficulty. It gives the image to the general public that their business is going down. Even if it is not always the case. Google’s parent company Alphabet is reportedly preparing to lay off about 10,000 of its “poor performing” employees, according to a report on November 23, 2023. Over $69 billion in revenue was reported for Google in the second quarter of 2022, up from $62 billion in the same quarter of 2021. Revenue of $69 billion is not indicative of a company that is struggling to perform well.
A layoff is actually an expensive process for a company. In the process of reducing the company’s workforce, the company is required to pay severance packages and increase unemployment insurance rates.
“We are working to support those who are affected and are providing packages that include a separation payment, transitional health insurance benefits, and external job placement support,” said Jessy- Amazon CEO.
As a result of too much hiring, a company will do its best to cushion the blow for laid-off employees. This in turn reduces the company’s workplace morale, which in turn leads to lower rates of productivity down the road. It leaves room for the remaining employees to wonder, “am I next to get fired?”
In addition, it is not uncommon for companies to lay off employees that have just been hired, usually with a bonus for recruitment, after they have been hired. There is a high possibility that they will go back to the market to recruit talent once the economy turns around within the next three months or 1.5 years. Later on, the company will have to compete with other industry players for the finest candidates. In other words, they are basically paying a higher price for labor. Definitely, it is a disastrous financial move.
Therefore, why are companies laying off again?
Alternative to layoff
Rather than laying off 10% of their workforce, Lincoln Electric gave everyone a 10% wage cut, except for senior management, which took a much larger cut. As a result, instead of giving 100% of the pain to 10% of the people, they give 10% of the pain to everyone.
The example of Twitter is an interesting one, Elon Musk who acquired the company for $44 billion, cut almost 3,700 jobs, and later reached out to dozens of employees who lost their jobs and requested they come back.
How can other companies benefit from the layoff?
According to James Goodnight, the CEO of SAS Institute, the last two recessions are the best time to pick up talent.
Prior to Meta’s announcement of laying off employees in November due to CEO Brad Gerstner’s open letter to Meta and CEO Mark Zuckerberg on Monday, October 24, 2022. According to the letter, the Meta investor suggested cutting headcount expenses by 20% and capping the company’s metaverse investment technology at $5 billion per year. Mark Zuckerberg also announced that the company would reduce its real estate footprint and eliminate some employee perks to save money.
Read : Open Letter to Meta
Meta experience an upward trend of its stock price at the beginning of 2023, at just over $120, and it gained to a high of around $128.
Another reason could be reports of layoffs at TikTok owner ByteDance. TikTok is a rising power in the world of social media, so any bad news for TikTok is good news for companies like Meta, Twitter, Snap, and more.
The Bottom Line
In certain circumstances, layoffs will help a stock for next-day trading, and short-term investments, but they will not benefit a stock by themselves. To date, laying off workers in order for a more positive balance sheet hasn’t proved to be a recipe for success and isn’t likely to become one in the near future. It’s unlikely that a stock will increase unless layoffs precede an important structural change.
Following the implementation of a workforce reduction, investors should see if the company announces any further changes. Without real growth, shares are unlikely to increase.
Many interesting journals have been written about layoffs, including
Layoff Announcements: Stock Market Impact and Financial Performance by Oded Palmon, Huey-Lian Sun and Alex P. Tang (1977)
Layoffs and stock market performance during the COVID-19 pandemic: evidence from the US by Floros, C.; Psillaki, M.; Karpouzis, E..(2021)
Stock market reactions to downsizing announcements: an analysis through an institutional lens by Ann-Christine Schulz (2021)
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