Tech layoffs to continue

The ongoing macroeconomic challenges, deflated tech stock prices and a letter from an activist investor and most of the stocks were a sea of red. Big Tech companies have joined the global layoff season. Adverse market conditions continue to bash profit margins and stock prices. The company is also facing calls from at least one wealthy activist investor to reduce “excessive” headcounts and per-employee costs. A report says, 6 in 10 companies will likely lay off employees in 2023 and 61% of business leaders agree that their organizations will likely have layoffs in the new year.

As the global financial situation weighs on wallets and portfolios, big names like Meta, Twitter and Amazon have all initiated layoffs in 2022. November tech layoffs alone have surpassed 45,000 heads, with the largest firms trimming the fat by 10,000+ heads each.

Some companies that go private disappear from public view. But Not Twitter. It’s hard to think of another corporate takeover whose aftermath has drawn much of the media attention, with many details leaking out. And that has surely complicated Elon Musk’s life, for instance, scaring away advertisers and possibly making it harder to recruit employees. Even so, Musk’s view that it would be easier to restructure Twitter as a private firm—expressed in an April text to Twitter’s then chair, Bret Taylor—was still probably right.

After all, while we’ve heard a lot about the untrammelled nature of Musk’s management style, we know little about what’s most important—the state of Twitter’s business, such as its current level of revenue, expenses and debt levels. Yes… Musk borrowed $13 billion in debt that carried very high interest rates.

It’s possible, though, that he will use his latest sale of Tesla stock this week, raising somewhere around $3.5 billion, to pay some of that off. That’s one interpretation of his tweet: “At risk of stating obvious, beware of debt in turbulent macroeconomic conditions, especially when Fed keeps raising rates.” The bottom line is that without knowing the key financial details, we can’t really assess the state of play.

As reported by the Information, based on the snippets that have been reported—such as ad revenue falling in some regions by as much as half—you can guess that lower revenue has largely offset the cost savings from employee cuts. It’s also likely that at current valuation levels Twitter’s equity has been all but wiped out.

Assume that its revenue is running at an annualized level of $4 billion now, down 20% from 2021. Then apply to that number the average revenue multiple at which Snap, Pinterest and Meta Platforms are trading. That implies Twitter’s enterprise value is just above $13 billion, equal to its debt level. If Twitter was still public, that would be clear as day, spotlighting the troubled state of the company.

But the value of the equity doesn’t matter much right now. Musk is surely playing the long game, as one might expect from someone whose ambitions include building a spaceship that can fly to Mars and revolutionizing the car industry.

While his chaotic transformation of Twitter is generating lots of noise in the news, assessing this situation requires time. Let’s see what things look like in a year or three. It’s too early to judge whether Musk’s takeover is succeeding.

Dr. Deepak Kumar Sahu, President & CEO, VARINDIA