Verizon to Slash Jobs: Cost Control or Fatal Error?
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the corporate world, one of the most feared forces is the union. Its mere mention rattles even the biggest of names. Verizon (NYSE: VZ) has, however, chosen to face this ‘common enemy’ after standing firm on its intentions to cut back on 1,700 jobs in its wireline unit.
Depending on what side of the table you are seated on, the move spawns two contrasting outlooks. The bullish investor may deem the move as a step towards cost effectiveness. On the flip side, the aspect of error lurks. What if cutting on jobs is a bad decision? What if it erodes Verizon’s public image? In case you don’t know, the public is by far the one of the most important stakeholders. It may not play a role in contributing capital but at the end of the day it can be the denominating factor in overall success.
Settling for either side demands a lot of critical reasoning - it is a battle of wits. In my line of thought, the best approach would be relating Verizon’s move to other prevalent tendencies in the market. Similarly, it would be in order to take a sneak peek into competitors’ backyards and establish if Verizon’s timing was spot on.
Looking at the predominant sheers in the market, it is clearly evident that telecommunication has taken a slant towards data and internet. Revenue from voice calls for most carriers has decreased dramatically. Most of the revenue stems from data usage as more consumers are embracing the idea of the internet (its flexibility and scalability is peerless). In the same breath, most carriers are placing more accents on wireless services. This is chiefly because they provide a wider base for internet services and can basically reach out to more consumers in a timely and more affordable fashion.
What does this imply? From Verizon’s angle, the wireline job cuts are necessary. It is all part of streamlining operations and maintaining sustainable numbers. I believe that if I was in the same position, I would be inclined to do the same. Verizon is a regular dividend payer. In addition to that, it lags behind AT&T (NYSE: T) and still has to worry about a ballooning CenturyLink (NYSE: CTL). At the end of the day, it becomes pretty clear that the telecommunication behemoth needs more income. What better way to do that than to implement job cuts and in the process reduce costs?
The flip side
Personally, I believe that the probable job cuts demonstrate Verizon’s inclination towards professionalism. However, even professionalism occasionally extends a deadly flip side. First of all, the wrangles brought about by the Union’s persistence may blow out of proportion. Negotiations may transform into lash outs and in the process attract a lot of public scrutiny. Already, some news sites are reporting that Verizon allegedly claimed that the Union’s assertions were ‘nonsense’. This can be dangerous as I am sure that Verizon really doesn’t want to test the heights to which an activist’s enthusiasm can rise.
In fact, the job cuts may negatively impact Verizon’s recently unveiled shared-data plans. These plans are intended to encourage data usage. Nonetheless, they move away from the previously implemented unlimited data plans. AT&T, a core competitor has also stamped out unlimited data plans. It is, however, yet to make a transition. Consumers believe that it will offer the same package as Verizon.
Despite the fact that Verizon is a step ahead of AT&T with regard to shared-data, consumers may fail to shift accordingly. This is of course if the union heightens its discomfort with the 1700 jobs (which in my opinion it will). Therefore, the job cuts may spell bad business for Verizon.
Timing is also an issue. The macroeconomic view is dim and the economy at large is still reeling in the effects of the Eurozone wrangles. As of now, contributing to unemployment pretty much adds up to shooting yourself in the foot. In case Verizon doesn’t know, a higher rate of unemployment hurts the tech industry as consumers tend to lean towards utilities.
Personally, I believe that Verizon has its best interest at heart with regards to the layoffs. It should however opt for a different strategy of cost reduction. Layoffs are not always the best option-especially so at a time when economic incertitude has secured anchorage in the market as a whole.
In as much as the layoffs may have their share of negatives on Verizon, there is still a positive side to Verizon’s story. Its agreement to part with $612 million for Hughes Telematics may positively favor the health of the stock.
Without necessarily going into details, it is a known fact that acquisitions tend to heighten expectations in shareholders and prospective investors. This one in particular grasps the attention of many because of its unique nature. Hughes Telematics deals with connected services for vehicles. Who saw Verizon drifting in that direction?
I believe that holding would be the best option. The whole picture is unclear at the moment and it would be in order to wait for the dust to settle before making conclusive decisions.
muhammadbazil has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.