They know exactly what they are doing. They are "knifing the baby". Some employees will suffer, but it is for the greater good. If the company fails (look at Nortel), then everyone suffers.
I've read the same script before. The way this move was presented to the employees had bad results. I doubt the bad parts were really necessary.
It's a complicated situation. I doubt there was a binary choice whether or not to knife the baby.