Recessions are funny (funny "strange," not funny "ha-ha," that is.)
When times are good, analysts and investors cheer new acquisitions, expansion -- basically, anything that means a company is getting bigger, and presumably better. But as last week's stock price bump at EMC (NYSE: EMC) demonstrates, in recessionary times, it's all about cutting costs, laying off workers -- in other words, to mix some metaphors, tightening the belt and battening down the hatches.
And so it was that investors cheered the company's pre-announcement of their expectation of a mere 4% rise in fourth-quarter revenues, and a 43% plunge in profits. Why? For one, they actually met the guidance they issued back in October. Secondly, in addition to $0.07 worth of charges for stock options and amortization of "intangibles," EMC is taking another dime-per-share off the table to pay for a major restructuring effort, and to pay severance to 2400 ex-EMC employees. After accounting for the cost of rearranging deck chairs and firing their former occupants, per-share profit will still amount to $0.13 to $0.14 for the quarter.
This is good news?
Judging from the 6% share price bump EMC received, apparently so. Investors, it seems, are discounting the short-term cost of EMC's restructuring, and trusting in management's promise that the move will yield cost savings of $350 million in fiscal 2009, and $500 million in 2010. If management is right, its spending cuts should pay for the bulk of its restructuring costs by the close of 2009, and begin adding to profits in 2010.
Ripples in a pond
But EMC's employees aren't the only ones who will face ramifications from the belt-tightening. In particular, I note that deep within EMC's press release is a snippet promising to "reduce indirect spend on contractors, third-party services and travel." This naturally raises the question of which vendors, doing business with EMC today, might potentially find themselves holding the short end of EMC's cost-cutting slipstick tomorrow.
Obviously, a company of EMC's size does business with a large number of companies. Capital IQ, a division of Standard & Poor's, names over 100 firms as dependent on EMC for a portion of their revenues. Notable among its supplier list are: Brocade Communications (Nasdaq: BRCD), Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM), JDS Uniphase (Nasdaq: JDSU), Nuance Communications (Nasdaq: NUAN), and Seagate Technology (NYSE: STX).
Tech's zero-sum game
Now most of these firms, being large themselves, should see limited effect from EMC's cuts. But that won't always be the case. The interdependency of firms in tech-land creates a bit of a zero-sum game. To the extent EMC helps its own profits by cutting costs, it hurts profits among its various suppliers by cutting their revenues.
Moral of the story: The next time you hear of a major tech player cutting costs, don't just cheer instinctively. First, find out if another stock that you own does business with the cost-cutter. Could be there's more reason to cry than cheer.
Why does EMC feel compelled to cut costs? Learn more in:
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