Downsizing, Company Reorganizations and Market Response

Shell fell to the lowest level in 25 years after announcing an overhaul of the company. The oil company Royal Dutch Shell Plc announced plans to cut up to 9,000 jobs worldwide, equivalent to more than 10% of its workforce, in response to the collapse of the demand for crude oil due to the economic impact caused by the COVID-19 pandemic and in the context of a major reorganization to transform the energy and gas giant into a low polluting emissions firm.

Along with other European firms of the sector, Shell is undertaking a transformation to become a cleaner and greener company with less oil assets by mid-century. While many investors have welcomed the news, others question the shift toward less-profitable renewable energies. The sector has been struggling with the impact of the coronavirus pandemic on global demand and oil prices. The Brent crude oil price fell due to new fears that restrictions to curb a second wave of the coronavirus pandemic will continue to hit the global oil demand.

Lowering costs is vital to Shell’s aspirations to enter the renewable energy sector, where margins are relatively low. The firm stated that the restructuring will imply additional annual savings of about $2,000 to $2,500 million by 2022. We are facing what in business jargon is clearly called a downsizing. That is, the process of reorganizing a company by improving work systems and adapting the number of employees to maintain competitive levels.

There are two types of downsizing:

Strategic or proactive downsizing, which happens when the company anticipates the changes that may occur in the environment to obtain faster results.

Reactive downsizing, which is carried out in response to the market situation, that is, restructuring what the market requires when different situations arise.

Shell´s downsizing can be considered a mix of both. What matters most is how investors and shareholders react to this strategy. Today we saw that the market did not receive the news very well. This is not strange as reorganizations at first tend to be negatively seen by investors. Although there is no certainty nor unanimity neither, there is an interesting paper (Capelle-Blancard and Couderc 2007) which shows that layoffs announcements usually have a negative effect on stock market prices, regardless of the country, the context and the firm.

Sometimes layoffs are seen as a good thing, a sign that the company is cutting costs and seeking to benefit from its results. Other times, layoffs may be viewed as negative, a sign that the company is in financial troubles and must cut jobs to maintain profit margins or continue to compete with other companies, and may very well cause shareholders to panic and finally sell. This time, the analysis is a bit more complex since the reorganization occurs at a delicate moment for the industry, submerged in constant ups and downs as a result of changes in demand and prices.

To conclude, the stock price reaction depends on whether the layoff is a sign of problems or a sign of an opportunity to improve the situation of the company. As we see here, the market perceived the Shell reorganization as a sign of distress and responded in consequence.

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