This is an audio transcript of the Behind the Money podcast episode: ‘What’s behind the job cuts in Big Tech?

Michela Tindera
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Lately, it’s been a rough time for tech companies and their workers.

Robert Armstrong
So over the last month or so, we’ve seen just about every megacap tech company, all of them have announced fairly substantial lay-offs.

Michela Tindera
That’s Rob Armstrong talking there. He’s the FT’s US financial commentator and writes a column called Unhedged.

Robert Armstrong
The companies we’re talking about — Meta, Microsoft, Google, Salesforce, Amazon.

Michela Tindera
And Rob says when you hear the explanations for why these companies had to do these lay-offs, it’s the same story over and over.

News clips
Said CEO Marc Benioff, “Salesforce, like many tech companies, boomed during the pandemic with people hunkering down at home. With the soaring revenues came a similar headcount.” In short, Microsoft just grew too quickly during the pandemic, and now they have to reset everything. Jassy said in the notes that annual planning “has been more difficult given the uncertain economy and that we’ve hired rapidly over the last several years”.

Michela Tindera
But Rob says these comments left him scratching his head.

Robert Armstrong
So there is a nice, easy story that is being sung in unison by these companies, we hired a lot because of high demand during the pandemic; demand is lower; now, we have to let people go. But there is a much bigger story or more urgent story in the background because the fact is these companies have been hiring a lot of people for a long time. It wasn’t just during the pandemic.

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Michela Tindera
I’m Michela Tindera from the Financial Times. In recent weeks, thousands of tech workers from some of the biggest firms on the planet have lost their jobs. Today on Behind the Money, we’re going to look at what’s really causing these giant lay-offs.

Hi, Rob. Welcome to the show.

Robert Armstrong
It’s great to be here.

Michela Tindera
So if you don’t think this pandemic induced hiring boom was the reason for these lay-offs, then why did they happen?

Robert Armstrong
So for a long time, let’s say going back to as long as 10 years ago, these companies were the darlings of not only the US but the world stock market. These four or five or six companies just only went up. Investors loved them. Everything they could do was right. The CEOs were the darlings of the business world. Investor appetites or preferences have changed and since a year or a year and a half ago, the prices of the stocks of these companies have fallen by 30 per cent, 40 per cent, 50 per cent, more in the case of Meta. And suddenly, what looked like these bulletproof, perfect world bestriding companies look a little vulnerable. There’s another element too that’s worth mentioning, is a couple of them have gotten nibbles from activist investors, who are saying, yeah, you’re a great company, but we’d like to see you tighten things up a little bit; we think you could be more profitable; we think you could take better care of shareholders. So, I think, imagine yourself as the CEO of Meta or Facebook or Amazon or Salesforce or whichever one of these companies, and rather than wait around for the activist investors with their pitchforks and their torches to show up at the castle door, maybe it’s better to show that you are taking efficiency and shareholder returns seriously on your own.

Michela Tindera
Mm hmm. OK, so activist investors are circling. Can you explain where this has happened?

Robert Armstrong
So, yeah, at Salesforce is probably the most striking example.

Michela Tindera
Right. So just to recap, it was revealed in January that the activist investment firm Elliott Management had a multibillion-dollar stake in Salesforce.

Robert Armstrong
Perhaps the most feared of all activist investors showed up in Salesforce and said, we think your company is great, but the stock price should be a lot higher, and we would like to engage constructively with you. I think you can pretty safely describe engage constructively as a kind of veiled threat there. And the interesting thing about Salesforce is that they have been all about growth and not created that much profitability. They do a lot of acquisitions. They hire a lot of people. They’re all about making the company bigger, but they’re just not that profitable. And Elliott’s coming along and saying, you know, enough is enough; you’re a big company now; you’re not a little start-up anymore; time to show investors the money.

Michela Tindera
Yeah. And over the last few months, we’ve seen activists pop up at Meta and Google, too. So can you lay out specifically what activist investors are saying needs to change at these companies?

Robert Armstrong
I think that in the case of Salesforce, again, which unlike the others, is not as profitable. I think what they want, they want margins to go up. They want probably less of the money that the company is generating, going to adding employees, rewarding employees, etc and more of it going to show profits, have them fall to the bottom line, make investors rich. At other companies, the issue is different. I mean, Google makes tons of money, but I think what they’re saying is with the investors who are either talking about these issues or are actually activist investors in these companies, what they’re saying is we’d like you to concentrate more on your core strengths. Do what your very best at and maybe a few less moonshots on the periphery, please. And that, I think, that’s actually a fascinating question. You know, as big and profitable as these companies are, tech is very competitive. And if a company isn’t trying new things, their incredible franchises are going to be overtaken eventually. So how much money do you want a very big, very profitable tech company to be spending on what are basically crazy ideas or look like crazy ideas at first. And, you know, a lot of these things go nowhere. But maybe when Amazon was an online retail company, and it said we’re actually going to start selling our computer capacity to other firms, people might have said that’s a really weird thing for a retailer to do. Well, that turned out to be one of the most successful business stories of the last 30 years.

Michela Tindera
Yeah.

Robert Armstrong
It became Amazon Web Services.

Michela Tindera
AWS, yeah.

Robert Armstrong
So sometimes this stuff works.

Michela Tindera
Yeah. Yeah, those are great points. So investors seem to be saying that big tech has gotten too big and maybe that is the perception more wider even than investors, that it’s, that it’s gotten too big, that it has too much baggage.

Robert Armstrong
Yes.

Michela Tindera
What do you think of that?

Robert Armstrong
I think it’s clear that if Meta, if Google, if Microsoft wanted to deliver higher returns to shareholders, they could. They’re not as lean and tough as they could be. I think that’s unambiguously true. But this comes back to the question I asked earlier, which is how efficient do you want them to be? Maybe you want them trying weird stuff. Right? How many experiments do we want? How much research into wild new things do we want our companies doing?

Michela Tindera
Yeah. So where do you see this going with these activist investors? How do you see this playing out with these companies? You know, I think we reported in the FT that Chris Hohn, the head of the activist investment firm TCI, commented on Google’s lay-offs and said it’s something, but it’s not enough. He thinks they should reduce their headcount to about 150,000, which is a reduction of about 20 per cent from last, last year.

Robert Armstrong
(Exhales heavily) Yeah.

Michela Tindera
What do you think of that?

Robert Armstrong
I think, you will know how it’s going to go by watching the stock price. Company’s stock price goes up, nobody complains. Company’s stock price flat or go down, people complain. So, Google, if they can’t get the stock price going the right direction, they’re gonna have to make changes. Whether they’re as radical as the changes TCI want, that’s a different thing. But people get restless when prices are going the wrong direction. And Google’s stock price went the right direction for a long time. So who knows how long this pressure is gonna to last.

Michela Tindera
One company that’s been missing from this whole discussion is a very big one. It’s called Apple. What’s going on there?

Robert Armstrong
(Chuckles) Well, I, I, I think it’s interesting. Its stock has done better than any of the other big techs. It’s sort of down as much as the market, but no more. And, of course, the the stock has done incredibly well. It’s widely thought of as so well managed. So I think of that as a support for my theory that what’s really going on here, what’s really changed here is the stock prices. Apple not announcing lay-offs, not under pressure from activists it’s because their stocks done, relatively speaking, OK. That said, that company’s been responsive to shareholders before. It does buy back a lot of shares and pay dividends. It is, relatively speaking, a shareholder friendly company, and that helps, too. I think Tim Cook runs a pretty efficient ship and so its stock price is pretty good, and it’s a pretty hard target for activists.

Michela Tindera
So these CEOs have made these statements that you pointed out

Robert Armstrong
Yeah.

Michela Tindera
. . . were all quite similar. You are pointing to a different reason for why these lay-offs are happening. Why do you think they’re explaining things one way when you see it a different way? Why wouldn’t they just say . . . 

Robert Armstrong
Stock . . . Yeah.

Michela Tindera
. . . we have these activist investors coming after us, and we need to appease them?

Robert Armstrong
OK. One thing you don’t want, no CEO wants to be dancing every time the market says dance. You know, you start going down that path, it’s nothing but trouble. When you ask CEOs about this, they say things like, look, my job isn’t the stock price; my job is making Armstrong Inc the best company it can be over the long term; the stock market is short term. This is not an entirely true answer, but it’s the kind of answer that they give for good reason. You know, they want to focus on their work not what the market says, that’s point number one. Point number two, they would rather run the company the way they want to run it rather than having the activist investors telling them how to run it. So they don’t want to be making concessions willy-nilly. Because where does it stop? So they have their own reputations and sense of control to think of.

Michela Tindera
Why is it that the first move that these companies make is to just do lay-offs? Why isn’t there another move that they could make?

Robert Armstrong
Yes, that is a, that’s an excellent question. And I hadn’t thought about this. I mean, they could have come out and said we are setting a target for margins to raise, to increase by, you know, three percentage points over the next two years. But then they’re accountable to that. Right? If you let 5 per cent of your workforce go, then it’s kind of done. You’ve shown that you’re serious about margins and costs and then you’re free to do whatever you want. A very ...

Michela Tindera
So it’s an easy fix.

Robert Armstrong
It’s an easy . . . 

Michela Tindera
Quick and easy . . . 

Robert Armstrong
Easy fix, and, and not only is that easy, but it doesn’t constrain you in the future. You’re not tying yourself to the mast, as it were, which these executives will not want to do. He didn’t want to be named, but I was talking to a, an experienced tech investor who made the point that when you’re running a company and if you increase margins, it’s very hard to then let them go down again. It’s like people freak out when that happens. So from a strategic point of view, you might want to not show the world exactly what a powerful profit machine your company is. Because if you show them, oh, I can produce margins at level X, if you ever want to spend some money in the future and that’s going to bring level X down a little bit, everybody on Wall Street, all your investors are going to throw their toys out of the pram, right? So it’s best to kind of keep things steady, even and not push profits up too much and then have to take them down again later. So, again, the lay-offs are a solution that shows you’re serious without committing yourselves to anything else.

Michela Tindera
Yeah. Of course, that’s probably not much of a consolation to the people who . . .

Robert Armstrong
None whatsoever.

Michela Tindera
 . . . these jobs were laid off.

Robert Armstrong
I mean, the only, I mean, yeah, the only, you know, having been sacked once or twice myself, it’s painful. And I think one consoling thought when you look at, I was thinking the same thing when Goldman Sachs laid some people off, at least, I imagine, the kind of people who work at Goldman Sachs or at Google, really qualified people, highly intelligent, probably more able to land on their feet than the average American worker. So that’s some, again, small consolation. But these are sophisticated, educated people who have a pretty good shot at finding work somewhere else, I think.

Michela Tindera
So, yeah, how do you see this playing out over the next year?

Robert Armstrong
Again, depends on what the stock market does. You know, the weird thing, of course, is that the stock market, what it’s going to do kind of directionally doesn’t have anything to do with what these companies do, but it will have an effect on these companies relationships with their investors so these companies could get out of all this pressure just by luck of the stock market in general, changing direction and the whole thing blows over and everybody’s happy. Pressure stays on, I think, you’ll see changes at these companies. The key thing for an activist, they never own enough shares to make the company change on their own. They buy a chunk of shares and hopefully a larger group of investors coalesce around them. So if the stock price keeps going down and they can gather a bigger constituency of investment, these companies are going to have to change. Now, there is a distinction to be made between those companies which are still founder controlled and those that are not. So both Meta and Google have, you know, dual class shares. So Mark Zuckerberg can just tell investors to go take a hike. He personally controls the company. If they don’t like it, he wants to run it a certain way, he just gets to do that. I think that’s a crazy way for a company to be owned. That’s a different podcast to discuss that, but . . . 

Michela Tindera
And that’s the same situation with Google, too, right?

Robert Armstrong
It is, it is the same situation, maybe to a less extreme extent but same situation. Whereas Amazon, Microsoft are not necessarily like that. So one story to watch is do the dual class share companies basically shrug their shoulders and say, if you don’t like it, take a walk. They, you know, the people who control through special voting shares control big companies. They want to see the stock price go up, too. So that would hurt them. But maybe Mark Zuckerberg has a vision of the future he cares more about realising than he cares about Meta his stock price.

Michela Tindera
Right. Yeah. I mean, he’s certainly well off (laughs). And yeah.

Robert Armstrong
Whatever happens, he’s not going to be worried about his next meal.

Michela Tindera
Yeah.

Robert Armstrong
Right?

Michela Tindera
Well, thanks, Rob, so much for being on the show.

Robert Armstrong
I love being on the show. I’ll come any time.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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