IBM Ponies Up Another $15 Billion for Share Buybacks
March 3, 2008 Timothy Prickett Morgan
Go ahead, call me stupid. Or old-fashioned. Or just plain Puritan. But I will never in a zillion years understand the logic of share buybacks–and especially those on a massive scale like IBM has undertaken since the mid-1990s. And last week, IBM’s board of directors authorized the company to shell out another $15 billion to buy back shares on the open market.
As IBM itself pointed out in its announcement of the share repurchase authorization, the company has bought back a staggering $94 billion in its own stock from 1995 through 2007 inclusive. IBM still has $400 million in buybacks it can pursue from a prior authorization. Last week, the company said that it would probably spend around $12 billion–out of cash flow from operations–to purchase shares in 2008. This share buyback effect will increase earnings per share this year compared to last year (because there will be fewer shares in the comparison), which compelled IBM to raise its earnings guidance by a nickel per share for 2008, which puts it in the range of $8.25 per share. But, IBM also tightened its range, which was between $8.20 and $8.30 per share prior to this announcement. Basically, IBM told Wall Street that it was confident that it was going to hit the low end of its earnings targets from only a few months ago, and it will spend $12 billion to buy a nickel per share to hit what was the midrange of its targets.
This is not just folly, it is obvious financial engineering of the most ridiculously wasteful kind.
While IBM’s managers are busy doing whatever it is they do, they could have done some truly remarkable things with $12 billion–not the least of which would be to pay people to work and improve the IT products of the world. Maybe make something those zillions of people want to pay a premium for? Call me silly, but to reach its targets of $10 to $11 per share earnings by 2010, IBM will have to fork out several tens of billions of dollars in share buybacks. Doncha think the $135 billion or so in share buybacks between 1995 and 2010 that IBM will likely pay could have been used to much greater purpose?
IBM’s execs, who get paid in stock options that require them to pump up stock prices as high as they can to maximize their own payoff (just like every other public company), have little choice but to endorse share buybacks if they are cynical about their own prospects to develop hot new products to generate equivalent earnings. There’s always the acquisition strategy, of course. IBM will have been able to buy SAP two times over by the time 2010 comes around, for instance. But here is what really annoys me about such strategies. If a company has confidence in its product development and looks for or creates new niches to chase, that company’s stock price will naturally rise because new products drive new earnings. In IBM’s case, it is old products–mainly mainframe hardware, mainframe software, and related services–that are creating the cash. And some day, that profit stream will dry up and IBM will not be in position with a new, vibrant, and profitable set of product lines. (Whoops! We invested in stock instead of products!) IBM could end up being like Apple had Apple not invented the iPod. All kidding aside.
I would prefer for IBM to wake up and do something useful with the piles of money it extracts from mainframe shops that are basically addicted to their COBOL code. Like just give it to the executives and employees with a pat on the back. Or maybe re-create a pension plan? (Silly me, I must be a communist.) Or better still, create new products and new markets and maybe live on as a corporation worthy of admiration and respect. This is just the height of laziness and a complete lack of creative thinking as far as I am concerned. I hope the ghost of Old Tom Watson starts haunting Somers and Armonk.