On Wednesday Citigroup announced that it is laying off 11,000 employees worldwide. The news buoyed investors. Citigroup's stock closed up 6.33 percent.
The planned layoffs should reduce expenses by billions of dollars over the coming years, though it will cost dearly in the short term.
"Every time they lay people off, it brings down their bottom line. Even though they take a charge of $1 billion for severance and whatever else, they will reduce costs annually by $1.1 billion starting in 2 years," says Justin Krane, CFP professional, founder of Krane Financial Solutions in Los Angeles.
The move is the first salvo toward streamlining operations by Citigroup's new CEO, Michael Corbat, according to Reuters' story, "Citigroup cutting 11,000 jobs, taking $1 billion in charges."
As it sharpens its focus on 150 high-growth markets, it plans to shed 84 branches in five countries, more than half of them in the United States.
After the restructuring, the bank will have 4,000 branches around the world.
When Citigroup changed CEOs in October, (chairman Michael) O'Neill said executives would continue Citigroup's strategy of paring back to operate core businesses more efficiently. The strategy has included emphasizing business in major urban areas.
Former CEO Vikram Pandit resigned in October.
Are layoffs always a boon for investors?
Though share prices sometimes get a boost when large layoffs are announced, the salutary impact of mass firings isn't always there. A 2001 report from Bain and Company, a global management consulting firm, looked at the one-year period from Aug. 16, 2000, to Aug. 15, 2001.
...companies with few or no layoffs significantly beat the S&P's 4 percent average increase. Those companies that laid off 3 percent or less of their workforces, and companies that had no layoffs, posted respectable 9 percent share price increases for the period.
Companies that laid off 3 to 10 percent of their employees, such as Newell Rubbermaid, saw their share prices remain flat, on average. But, companies that laid off more than 10 percent of their employees, such as Sapient and Qwest, watched their share prices plunge -- in that case, by 38 percent.
The report details several reasons that layoffs can fail to inspire confidence in a company's future earnings vis a vis stock price -- including the fact that repeatedly booting out large swaths of workers is "often symptomatic of flawed strategies that inevitably produce poor results."
Other reasons include severance costs, damaged credibility and the loss of productivity as a result of downsizings.
In the case of Citigroup, the announcement Wednesday stated that the company will save $900 million in 2013 and more than $1.1 billion beginning in 2014. Many of the layoffs will come from Citigroup's global consumer banking division -- approximately 6,200 positions according to the press release. As a result, the company plans to sell or reduce operations in Pakistan, Paraguay, Romania, Turkey and Uruguay.
"They did have a lot of dead weight in Pakistan and Paraguay and Turkey. I see that as being optimistic, but I still wouldn't buy the stock," says Jeff Sica, founder and president of Sica Wealth Management in Morristown, N.J.
"I think it's somewhat redundant to have much hope because they still haven't outlined their plan for growth in the future. It will be a temporary market boost. It's off five years of horrendous dismal returns. Anything they get now is based on the result of cost-cutting," he says.
What did you think about the Citigroup announcement Wednesday?
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