After layoffs at Spotify, high interest rates may come for other tech companies next
AYESHA RASCOE, HOST:
Borrowers in the U.S. have been hit with higher interest rates this year as the Federal Reserve tries to push down inflation. And tech companies are no exception. Last week, Spotify announced it will cut roughly 17% of its workforce in its third round of layoffs this year. And the company CEO blamed higher borrowing costs as one of the reasons for the cuts. But Spotify isn't alone. Many tech companies borrowed and borrowed money when interest rates were low to grow business. Mark Williams is a professor of finance at Boston University's Questrom School of Business, and he joins us now. Welcome to the program.
MARK WILLIAMS: Well, thank you - happy to be here.
RASCOE: So why are higher interest rates hitting the tech industry so hard in particular? Like, why is tech more vulnerable to this?
WILLIAMS: You know, if you think about high tech, high tech's all about growth. And for them, the formula of success for growth was really taking on lots of debt. So they borrowed big, and they spent big. They took that money. They hired a lot. They put a lot of money in advertising and research and development. And they hope for growth. And over time, profit came.
RASCOE: And so the hope is that you borrow, and then it pays off. But if interest rates get higher, it makes it harder to borrow. And if you haven't already paid off, you know, what you already borrowed - does that make sense?
WILLIAMS: Right. Their strategy was really risky. In 2021, it didn't seem so because rates were at ultra-low levels, 50-year lows not seen since JFK was president. So they just loaded up on debt. It was really cheap debt - almost at zero interest rates. So within 18 months, by 2023, rates had skyrocketed. The Fed increased rates 11 times to now ultra-highs not seen since, well, 22 years ago. So they're in a pickle.
RASCOE: Are tech companies the main industry hit hard by this? Are there other companies or, like - or are there certain tech companies in particular that will be most impacted?
WILLIAMS: Well, high tech in particular because they are a growth company and a growth industry. So they focus on taking on leverage and lots of debt to grow fast. I'll give you examples - Amazon and Google and Microsoft and Meta, which, of course, was Facebook. All those companies just in the last year have fired about 49,000 people. So in essence, the overall loss of employees within the high-tech sector, it's been a mass firing of over 281,000 employees fired since 2022.
RASCOE: But it seems like when you start talking about Amazon, you know, Meta, Google, don't these companies have lots of money? They're not just startups.
WILLIAMS: Right. And that's a really important point. So Amazon, clearly, and Google and Microsoft and Meta - they're all going to weather the storm. But really the story is about these small startups. And those are the ones that are really caught in this vice grip. Interest rates are really high. They can borrow less now. Their growth rates are definitely going to slow down. Maybe the startups won't get the existing funding they need. These are novel drugs, new therapeutics that may never go to market because they can't get funding anymore.
RASCOE: So you mentioned biotech, and I'm thinking when you're talking about development of therapeutics and stuff like that, but what exactly is going on with biotech?
WILLIAMS: Well, biotech itself back in 2019 and 2020 when interest rates were low, they received huge evaluations. So they were able to get lots of funding. Now with a high interest rate environment, many investors are skeptical of the level of risk and willing to take it. So these valuations now have been dropped. And many of these biotechs are having and struggling to find valuations and actually funding for their operations going forward. And they need a lot of money with R&D and investing and hiring to really get their product to market. So the concern is that that spigot has been turned down dramatically with higher interest rates.
RASCOE: So forecasters and analysts say higher interest rates are here to stay, at least for a while. And you talked a bit about this, but what are going to be the consequences for tech and biotech companies?
WILLIAMS: This is of concern. You know, innovation is key not just for developing new therapeutic drugs that help people, but also startups create new jobs. So new job generation, green shoots and so forth appear to be - actually going to be stilted. And then these lost opportunities I mentioned earlier on the therapeutics.
RASCOE: That's Mark Williams, professor of finance in the Questrom School of Business at Boston University. Thank you so much for being with us.
WILLIAMS: Well, thanks for having me, and have a nice holiday season.
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