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2HRS2GO: StarMedia investors want growth, not cuts

COMMENTARY -- Wall Street wants faster profits and StarMedia Networks (Nasdaq: STRM) complied, but the end isn't justifying the means, as far as investors are concerned.

Not that the Street has suddenly developed concern for laid-off employees; that would be akin to Mike Tyson feeling remorse. But layoffs make investors wonder: what's going on?

While the overall Nasdaq rose, shares of StarMedia lost more than 13 percent today, following the Latin American portal operator's decision to slash 125 positions. StarMedia has snapped up 10 companies over the past year, and companies executives describe the cuts as part of the normal integration process.

That reason is easy to accept in some cases, such as a merger of two long-time telecom companies with hundreds of thousands of employees spread across a massive bureaucracy that includes stagnant businesses.

But StarMedia paints itself as a leader in a largely untapped, rapidly expanding field. You usually hear companies in those situations describes their M&A as "all about growth," the idea being that you merge to increase your scale and create more opportunities for all employees.

Paving a faster path to profit on the backs of expense cuts doesn't cut it with Wall Street, not in a relatively young field like Internet content in Latin America. It suggests the company's business model isn't robust enough to support a staff of 850, which isn't that large when you consider the number of countries covered by StarMedia.

Slashing jobs raises even more questions in a people-intensive field like Internet content. These business aren't manufacturing assemblies where significant chunks can be automated. They're not service operations such as customer support centers or banks, which can direct users to a do-it-yourself website or ATM.

Consider this quote from a February STRM news release touting the acquisition of Ola Turista, a Brazilian content company:

"With these new properties, StarMedia has gained innovative and experienced teams, and an array of services which, in addition to StarMedia's existing offerings, ensure that a user's every need -- whether it be chatting with a friend in another country, checking weather in a different city, or locating the best restaurant in the area -- is met."

Notice the first thing mentioned? Teams. Meaning people. Yet CEO Fernando Espuelas told the Wall Street Journal that areas targeted for cuts include editorial, design, marketing and technology.

StarMedia is a portal business, meaning it's largely an editorial business. You need people to put together ads, design pages, and compile news stories, culture guides and entertainment listings. This column doesn't write itself, it doesn't fill in blanks on a standard template, even if it sometimes reads that way.

So how does StarMedia improve itself by cutting jobs? That's what Wall Street is asking today.

Is the skepticism unfair? Probably, especially when you consider that StarMedia isn't lowering revenue figures. The company doesn't expect these cuts to affect its previous business goals, and that's good. Really good, actually.

Company observers generally applauded the cuts. CS First Boston reiterated a "buy" rating, Goldman Sachs raised its bottom line estimate for fiscal 2001, and news reports contained approving quotes from analysts of other brokerage firms.

But the real problem came with the way StarMedia carried out these cuts. If this plan was truly a natural result of StarMedia's ongoing acquisition strategy, there was no need to announce it.

Just lower your headcount gradually, watch your operating margins increase and field any questions about it during the quarterly conference calls. Those calls are also the proper venue for updating profitability targets.

Long-time stalwarts do it that way. Oracle (Nasdaq: ORCL) -- to cite an example scheduled to report quarterly results after the closing bell today -- cut jobs in certain service areas during recent quarters, but didn't make a big deal about it. No one would even know, except that some analysts pored through the numbers and asked Oracle executives about it during the last conference call.

Oracle has been rewarded for its margin improvements. In fact, analysts expect to hear a lot more about it this afternoon.

On the other hand, announcing cost-cutting moves in one big chunk with a separate news release makes them sound like an unusual event. StarMedia sounds desperate to please Wall Street: "Look, we CAN be a profitable business model, darn it!"

Boosting sales growth would make investors happier, because they don't want to hear that StarMedia's staff is too big. Quite the opposite -- they'd rather find out it's not big enough. 22GO>

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