UK: Job cuts and share gains.

UK: Job cuts and share gains. - When Sir Kit McMahon got kicked out of Midland Bank he was not the only man with more time to devote to his family. Overall unemployment figures rose to over two million in April and look set to reach nearly three million

Last Updated: 31 Aug 2010

When Sir Kit McMahon got kicked out of Midland Bank he was not the only man with more time to devote to his family. Overall unemployment figures rose to over two million in April and look set to reach nearly three million by next year, so it is hardly surprising that redundancies have been much in the news of late. Last year Midland announced 4,000 job cuts. This February British Airways announced that it was shedding 4,600 staff. In March British Telecom and British Aerospace followed suit with redundancy programmes of 6,500 and 4,700 respectively. Even good old Marks and Spencer is feeling the pinch.

But what happens to share prices when major redundancy plans are announced? Management Today has tracked prices for eight companies in several business sectors from the day before the announcements were made to some 12 weeks after the news broke. In every instance but two the share price showed an immediate increase. BAe shares had also picked up within a month, though at Midland it was another matter. The continuing crises of Sir Kit saw shares plummet by nearly a third in the following three months.

How shares are affected by redundancy announcements

Day before 1 week 4 weeks 12 weeks

British Aerospace 625.00 614.00 628.00

VSEL 405.00 408.00 408.00

Barclays 400.00 447.50 442.00 432.00

Midland Bank 277.00 265.00 263.00 190.00

British Airways 141.00 152.00 160.00 171.00

British Telecom 312.50 337.50 340.00 378.00

Marks and Spencer 254.00 257.00 249.00

Storehouse 107.00 110.00 127.00 136.00

Source: Datastream.

Among those who had bitten the bullet, the rise was not always sustained. At M and S, on news of 600 job cuts in April, shares wobbled around the 260p mark, only to slide back to 249p in the next two weeks. At BAe the story was similar. Shares took off from their 625p starting point to reach a cruising level of 650p, before nosediving to 594p in subsequent months. Sir Roland Smith must be flying on more prayer than wing, while Lord Rayner might think of changing his patron saint.

Nevertheless, for a number of companies the medicine seems to have been swallowed by the City and staff alike. At Barclays the share price surged to a high of 479p, up a remarkably strong 79 pence, then slumped by some 30 pence. But Sir John Quinton can, it seems, bank on increased City confidence.

At armaments manufacturer VSEL the immediate gains were small, but recently the share price has continued upwards, reaching a high of 431p towards the end of May. So far so good, though with peace restored on the western front, weapons may soon go out of fashion again.

As for those who specialise in other sorts of fashion, the thaw has never set in. But, despite the frosty climate for retail, Storehouse gained some relief when BhS, its troubled subsidiary, announced cuts of 900 last year. Shares climbed from their 107p starting point to 138p, before settling well above initial levels.

At BA and BT the news was even better, though this must be the only good news on Lord King's horizon. He recently warned that BA would lose money in the first quarter of this year and might be shedding routes. But Lord King clearly commands the respect of the City. In the three months after cuts were announced BA shares climbed from 141p to 171p.

At BT, chairman Iain Vallance's plans to reduce the number of operators sent the stock market straight to the telephone. Mind you, the Square Mile could hardly fail to have confidence in the Vallancing act of a virtual monopoly. Shares rose by a healthy 20% from 312.50p in February to a comfortable 378p by the end of May. With its spectacular profits over the past year, BT's switchboard may soon be jammed.

If the fate of the eight companies that we have looked at is in any way representative, one thing should by now be clear: buy on bad news, sell soon after. Right now redundancy announcements look like a good way to make a quick buck. And if you are unlucky enough to be among the victims, it may be the only buck that you will be getting.

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