What Could IBM Do Instead Of Spending $12.2 Billion On Shares?

Published: October 31, 2011

by Timothy Prickett Morgan

Just ahead of naming Ginni Rometty the president and chief executive officer of IBM effective January 1, the board of directors of the company got down to a little traditional business, hiring a new board member and allocating funds for Big Blue to keep trotting down to Wall Street to buy back billions of dollars of its shares.

The new board member is David Farr, who is chairman and CEO of Emerson Electric, a manufacturer of air conditioners and commercial power and cooling systems, among other things, that also happens to be a big player in the data center racket as well as an IBM partner. Farr hails from Elmira, New York, not more than a day by horse-drawn cart from the ancestral stomping grounds of IBM founder Thomas Watson, and on the same road that eventually led Watson to Endicott, New York, and the company that became IBM a century ago. Farr has been running Emerson Electric since 2000, and will join the IBM board in January when Rometty becomes CEO of Big Blue.

At the same time, IBM announced it would be paying out its 75 cent quarterly dividend in December, and that the board had also set aside $7 billion to buy back more IBM shares on the open market. IBM< already had $5.2 billion leftover from the last buyback authorization, so now it can spend $12.2 billion between now and the April 2012 board meeting, when the board is expected to get out the checkbook once again.

"IBM's higher value, higher margin business strategy has enabled the return of over $109 billion since 2003 to our shareholders through share repurchases and dividends," current president and CEO Sam Palmisano said in a statement. "Shareholders can expect that as IBM enters its second century we will continue to invest in new products and services, while expanding IBM’s business into new, emerging markets."

As readers of The Four Hundred know full well, I am not a big fan of continual share buybacks, and this is the case for a lot of reasons. And I usually take a whole lot of flack for going after IBM whenever they engage in this financial engineering. The top brass get investors to look at earnings per share, instead of actual earnings, and then they reward themselves for earnings per share growth, with shares and bonuses of course. And, because you always need to show EPS growth, you have to keep buying that stock and in the case of IBM today, when its stock is flying pretty high, taking each share of the market costs quite a bit of dough. At prevailing prices for IBM's shares last week, that $12.2 billion will only concentrate (the opposite of dilute) IBM's shares enough to boost flat earnings by 5.6 percent between now and April if all of the money was spent between now and then.

There are so many other things that IBM could do with that $12.2 billion. For one thing, it could spend more money developing and supporting its products, increasing customer satisfaction and widening its customer base. This may not lead to a more profitable IBM, but it might, and it could yield an IBM that is built for the long haul, not the short haul. For instance, imagine if IBM dedicated the money it spent on shares in a cloudy infrastructure like the one that retailing giant Amazon started building seven years ago. Imagine an IBM that spent money on IBM i marketing. Or, heaven forbid, if IBM gave employees better benefits or a bonus. Or even decided to hire more people because the economy is weak.

I could go on. For a long time. I am not tired. I'll still be here, moaning about this and reminding IBM of what it ought to be doing, when Palmisano is retired and Rometty is retired and the next CEO is doing whatever he or she is doing. Maybe, just maybe, one future CEO will have the courage to tell Wall Street to stuff it and build truly remarkable and different IT products and services. There are always possibilities. And I am here to remind Big Blue of them when no one else seems to.

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