Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Microsoft Announces Painful but Necessary Layoffs


Microsoft is making some much-needed unpleasant moves in its switch to a new business model.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Microsoft (NASDAQ:MSFT) announced this morning that it is cutting up to 18,000 jobs, 12,500 of which come from overlap related to the acquisition of Nokia's (NYSE:NOK) Devices and Services Business.

Last week, CEO Satya Nadella sent out a long memo emphasizing Microsoft's increase on a "mobile-first and cloud-first world." He said "We will increase the fluidity of information and ideas by taking actions to flatten the organization and develop leaner business processes."

That drove speculation that layoffs were coming, but this 18,000 number is much bigger than expected.

While ugly, it's probably necessary. Nokia needed to be trimmed down, and from a bigger-picture perspective, Microsoft is notoriously beaurocratic and in need of a reset.

There is a clear parallel with IBM's (NYSE:IBM) comeback in the 1990s.

The Microsoft of 2014 is in much better shape than the IBM of 1993, but they share an important common thread in a need to shift away from an at-risk core business.

For IBM, it was the mainframe business.

For Microsoft, it's Windows.

IBM successfully made the shift to services and software, while Microsoft is aiming to escape the PC cycle and run a subscription-based cloud software business that can generate steady, high-margin fees until the end of time.

If pulled off, shareholders should benefit -- look at how well Adobe (NASDAQ:ADBE) has done vs. the Nasdaq (INDEXNASDAQ:.IXIC) since announcing its Creative Cloud in October 2011.

Of course, Adobe had the benefit of weak competition. It just drove [subscription required] Apple (NASDAQ:AAPL) out of the photo software business.

Given the inroads made by Google (NASDAQ:GOOG) Android and Chrome, and Apple iOS and OS X, Microsoft knows the traditional Windows business is at risk of gradual decay. Painful acts now can reduce the pain later. There was effectively no Windows 8 upgrade cycle, and the recent stabilization in PC demand [subscription required] was largely the result of delayed upgrade cycles and the drop in support for the popular Windows XP.

And from a near-term financial perspective, Microsoft does need to trim down a bit if it's to continue on its aggressive capital return programs. Three-quarters into the current fiscal year, Microsoft has paid out $12.7 billion in dividends and buybacks, or 69% of free cash flow -- up from 48% of free cash flow in the year-ago period.

I'd also note that Microsoft is on an upswing in investing activity. CapEx is up 69% year-to-date, and R&D is up 8%.

Twitter: @MichaelComeau

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
Position in AAPL
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos