Quote of the Day – Possible Side Effects

Further, there can be no assurance that our business will be more efficient or effective than prior to implementation of the plan…

Activision Blizzard – SEC Filing about the impact of laying off 8% of staff

Activision Blizzard caught more than a bit of heat last month when it announced record revenue and layoffs in the same investor call when going over its 2018 financial reports.

But, you know, Activision Blizzard is a publicly held business and so cannot rest on its laurels.  It has to set expectations for the next period, which it said would see a decrease in revenue.  To show they were addressing that up front they opted to give the axe to 8% of the company.  It was their fiduciary responsibility.

I do wonder how fiduciary responsibility plays out when CEO Bobby Kotick is asked to explain the $33 million in compensation he received last year.  Is he really worth the 100+ senior developers that kind of money could hire?  That number was enough to earn him the #2 spot on the Top 100 Most Overpayed CEOs list, which ranked CEOs on the financial performance of their company relative to their compensation.  He is ranked worse than Virginia Rometty, the latest charlatan trying to keep the corpse of IBM shambling down the road just long enough to cash in.  Not a good look.

Anyway, people got the axe because the company needed to trim sails for 2019.  It was required.

And then this past week came the SEC filing that covered the planned staff reduction, which said this about it:

In February 2019, we announced a restructuring plan under which we plan to refocus our resources on our largest opportunities and to remove unnecessary levels of complexity and duplication from certain parts of our business. While we believe this restructuring plan will enable us to provide better opportunities for talent, and greater expertise and scale on behalf of our business units, our ability to achieve the desired and anticipated benefits from the restructuring plan within our desired and expected time frame is subject to many estimates and assumptions, and the actual savings and timing for those savings may vary materially based on factors such as local labor regulations, negotiations with third parties, and operational requirements. These estimates and assumptions are also subject to significant economic, competitive and other uncertainties, some of which are beyond our control. Further, there can be no assurance that our business will be more efficient or effective than prior to implementation of the plan,or that additional restructuring plans will not be required or implemented in the future. The implementation of this restructuring plan may also be costly and disruptive to our business or have other negative consequences, such as attrition beyond our planned reduction in workforce or negative impacts one employee morale and productivity, or on our ability to attract and retain highly skilled employees. Any of these consequences could negatively impact our business.

Basically, this planned layoff might not change anything and could possibly make things worse.

Now, I know that in the litigious world in which we live a public company has to cover its ass lest their publicly announced plans not go as expected, leading to lawsuits.  It is pretty much the same way that drug companies have to list all possible side effects… and I love when “death” gets its own spot on those lists… so that they can later claim that they warned you that you might end up with eczema, high blood pressure, sleeplessness, or death.

But it still undermines the confidence shown on the call that laying off almost 800 people from the company was necessary to see it through 2019.  And it further exposes the assumption that a CEO like Bobby Kotick is paid so much because he knows what to do, that his expertise is somehow worth all that money.  The ATVI stock price, the all important absolute measurement of a company’s value for Wall Streets, seems to indicate that over the last he wasn’t all that.

Meanwhile, as a side note, buried in that filing, is a statement about the top franchises of Activision Blizzard:

For the year ended December 31, 2018, our top three franchises—Call of Duty, Candy Crush, and World of Warcraft—collectively accounted for 58% of our net revenues.

So if you’ve been gloomy about WoW, or worried that something else might be taking over the main focus at Blizzard, you can feel a bit better.  If you’re an Overwatch fan though… well… Overwatch made the “top franchise” cut in 2016 and 2017, but appears to have fallen below the line for 2018.  The line is apparently set at the 10% or more of total revenues mark.

5 thoughts on “Quote of the Day – Possible Side Effects

  1. Archey

    Being in technology, I am somewhat less than surprised that the #1 spot on the overpaid CEOs list belongs to Oracle.

    As a side note, some of the companies listed there might be comparing apples to oranges. In particular, large oil companies tend to lose money in years when the cycle is down, and make a lot when there is a boom (I.e. the oil biz is very cyclic). So you could easily pick a year that makes them look worse than others.

    However, that doesn’t apply to Activision Blizzard. I guess the only way we will know if he is worth all that is if they continue to flounder or experience a resurgence in the coming year(s).

    Liked by 1 person

  2. JThelen

    That verbiage has less to do with legal cover and more to do with financial reporting requirements under US GAAP. Any time you have a structural change in your company like this, you have to report what change you’re making, what the potential impacts to your core business are, what outcome you’re hoping for in doing it, as well as any potential downsides. Reading through their 10-K, I see literally nothing but what I would expect to see following that sort of change.

    As for Kotick’s total compensation, good grief, everyone bitching about that needs to give it a rest already. The overwhelming majority of his compensation is in stock awards and options, and are unrealized. He actually took a cut going from 2016 to 2017 in salary of ~26% according to the proxy statement they filed in April 2018. And when you compare how they’re paying in that regard to comparable companies, they’re in the bottom third. I get that he’s easy to hate on, but that is why he gets paid so much; because of the amount of discontent people heap on him.

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  3. Wilhelm Arcturus Post author

    @JThelen – He gets paid so much because people hate him because he gets paid so much! Your logic is impeccable.

    If you went to the link, this wasn’t Mother Jones decrying the inequities of late stage capitalism. This is a group that believes in the current compensation methodology, that CEOs getting paid many multiples of even their top tier producers is a good thing, so was based on the performance of the stock in 2018. They even have a number that they feel he should have been compensates, which was about $13 million based on the performance.

    Also the “it was in stock and it lost some value since” defense is straight up BS. He can’t always sell the day it is award due to the rather onerous blackout windows, but he could have sold soon enough if he wanted the stated value. And, in any case, that it can lose value is supposed to be the point, that he cannot just collect his cut and let the company stock value drop. But when you give somebody so much stock that it doesn’t phase him a bit, that the lost millions are so far beyond his needs that he doesn’t worry about exercising and selling, what then? And, at the same time the company is laying off some of the lowest paid people in the company. What does that say about the system?

    This is the sort of thing that gets people like Alexandria Ocasio-Cortez elected and on the news every night.

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  4. SynCaine

    About CEO pay; there is also a rather large factor in this, in that their peers (on the board) approve their pay, and then that CEO becomes a peer on different boards, and around we go. That kind of self-approval doesn’t happen at lower levels, which is why pay isn’t 200x the average employee. CEOs should get paid a lot, yes, but when the multiple is in triple-digits, it’s basically impossible to justify on a cost/performance basis.

    Liked by 1 person

  5. Wilhelm Arcturus Post author

    @SynCaine – Yes, the compensation committee at most companies is made up of people who support the status quo and are, or aspire to be, compensated in the same fashion, so it is in their best interest to promote this sort of thing. The system is forever self-reinforcing.

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