Layoff announcements in the technology sector have been rampant over the last few months. Alphabet (Google’s parent company), Microsoft, Salesforce, and Ottawa-based Shopify have all reduced their headcount. Meta, the owner of Facebook and Instagram, and Amazon have both announced additional rounds of cuts—with the latest announcements coming in mid-March.
While these cuts may not have been necessary due to their strong balance sheets (for example, Alphabet had more than US$110 billion in cash and short-term investments at the end of 2022), there are a few reasons for them:
- First, many tech companies hired thousands of employees during the early days of the pandemic because of increased demand for their products and services. However, that demand has leveled off over the past year.
- Second, the economic environment has become more uncertain as inflation has soared to multi-decade highs in Canada and other large economies. Central banks have raised interest rates significantly in the last year to try and tame inflation.
- Third, tech companies are under pressure by either hedge funds or activist investors to maintain high levels of profitability. For instance, Third Point, Elliott Investment Management, and Starboard Value are among those pressuring Salesforce to improve the bottom line.
Although most large technology companies have enough cash on hand to weather a downturn, some smaller firms may not be as well prepared.
Business restructuring strategies to consider
A restructuring can mean many different things to a business, depending on its current financial position and anticipated prospects. It can be as simple as layoffs or as complicated as a Companies’ Creditors Arrangement Act filing. Whatever the strategy, your business has many options to consider when preparing for a potential economic downturn. Here are just a few:
- Profit and loss (P&L)/balance sheet analysis—This involves reviewing the P&L statement or balance sheet to gain additional insights. For example, you may notice labour costs rising due to inflation and decide that’s one area where costs can be reduced.
- Divest assets—Some of your divisions, including those that are non-core assets, may be attractive to some buyers. However, if the economy worsens, the division might sell at a discount, or it may even be too late to sell because there are no longer any interested buyers.
- Raise capital—This can be done either by equity or debt financing. However, with the recent hikes in interest rates over the past year, the cost of carrying debt will now be higher than before. Additionally, valuation multiples have taken a significant hit since the early days of 2022.
- Balance sheet restructuring—This is typically an agreement between debt and equity holders where they make concessions to strengthen the balance sheet. Some methods may include a debt-for-debt exchange, a debt-for-equity swap, a debt repurchase, or a formal restructuring filing to deleverage the company.
One of the most important things your business can do during a restructuring process is to maintain stakeholders’ trust and confidence. This means keeping stakeholders in the loop and giving them enough information that’s the most relevant to them. Controlling the narrative is crucial to maintaining situational control and confidence with your stakeholders.
Why businesses need a strategy
Having a strategy to deal with a downturn is important. Without one, your company is more susceptible to changing market and economic conditions—making it more difficult for a successful business turnaround if it’s needed.
The key is to manage the company proactively, which may include voluntarily seeking creditor protection. While this may require more work and costs over the short term, being reactive can end up being more expensive and detrimental to the business over the long term. Reacting to a slowdown can make it harder to manage costs and maintain control of the situation.
How BDO can help
Our trusted advisors have helped technology companies in different financial situations with a variety of services, including a formal or informal restructuring, financial advisory, management consulting, valuations, transactions, process improvement, and capital management. We work with small businesses and enterprise customers, serving them at a regional level across Canada or with our global network of BDO advisors.