Why Are Rich Companies Laying Off Poor Workers?


With an economic recovery like this, who needs a recession?

Several major corporations have been announcing layoffs in recent weeks, despite their fattening coffers.

BlackBerry maker Research in Motion (RIMM) revealed this week that it will cut 2,000 jobs. Last week it was Cisco (CSCO) eliminating 6,500 posts, including 2,100 employees that had opted for early retirement. Campbell Soup (CPB) and handset maker Nokia (NOK) have also gone public in recent months with their pink slips showing.

Consumers don't applaud layoffs. Investors who may initially cheer cost-cutting moves eventually realize the gravity of the situation. The American Management Association reports that 88% of businesses going through layoffs report declining employee morale, so it's not as if those who survive the cut aren't busy firing off copies of their resumes elsewhere.

However, the real shocker here is that many of these companies executing layoffs aren't exactly in dire financial straits.

What's With the Pink Slips? We've Got Billions in the Bank!

Analysts following these four companies expect profitability to continue in the coming quarters. With the exception of leveraged soup maker Campbell, the other three companies have billions of cash on their balance sheets:

  • Nokia has billions in cash and no long-term debt.

  • RIM closed out its latest quarter with nearly $2.9 billion in cash and investments but also with no long-term debt on its balance sheet.

  • Cisco is saddled with $16.2 billion in long-term debt, but it's one of the richest companies on the planet with $43.4 billion in cash and equivalents.

Why are companies that clearly have the money to keep their employees as stress-free and productive as possible endangering that stability with sharp job cuts in the middle of this alleged recovery? The answer -- at least in Cisco's case -- may have something to do with the illusion of its cash-rich balance sheet.

Your Money's No Good Here

Cisco has a problem that is all too familiar with many multinational giants based in the United States. The tech bellwether can't bring back profits earned overseas without facing steep taxable consequences. Most of Cisco's $43.4 billion in cash is waiting to be repatriated.

Like a minor eyeing a juicy trust fund, the money's there -- but it can't be touched.

There is an estimated $1 trillion in profits locked up this way, and legislation was introduced in May to help bring some of that money back home. The government has to decide whether it wants to allow companies to repatriate overseas cash at a nominal tax rate 5.25%, well below the top corporate tax rate of 35%. The bill would penalize participating companies that stray from historical hiring standards after repatriating profits, an important provision that should sway legislators that normally wouldn't vote for a corporate tax break.

Cisco CEO John Chambers argued that he could raise his company's headcount by 10% if he were able to bring home as much as $30 billion in overseas profits, but that was before last week's sobering dismissals. Do the layoffs validate the pressing need for the repatriation tax holiday or did Cisco just sink the bill's chances?

Either way, this doesn't explain the moves at RIM and Nokia: RIM is Canadian; Nokia hails from Finland.

Maybe It's the Shoes

There's another explanation for the deluge of pink sheets lately. Could it be that these companies are simply aware of their fading relevance?

Cisco hacked away at most of its consumer-facing businesses earlier this year, nixing the Flip camcorder line along the way. Nokia and RIM continue to lose market share to iPhones and Android-fueled smartphones. See, it's all about shrinking BlackBerry pie slices and Nokia phone fizz-outs.

Cisco posted uninspiring net sales growth of 5% in its latest quarter, and analysts expect that rate to contract over the next two periods. Wall Street is braced for year-over-year declines at RIM through its next two quarters. These two companies were tech darlings a couple of years ago, but they failed to keep up with the market.

An optimist would argue that this is the time to increase payroll, or at the very least invest in the reinvention process. It's a valid point, but influencing corporate America is never as easy as getting Wonka's candy factory to raise the bar with the everlasting gobstopper.

RIM, Nokia, and Cisco can't buy their way back to their "before" pictures, even if they clearly have the financial means. Their job cuts are indicative of disruptive, and probably irreversible, trends in their flagship businesses. The best that consumers -- and job seekers -- can hope for is that the disruptors are hiring as fast, if not faster, than the disrupted are letting folks go.

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Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems.