IBM company overview and business operations

IBM: Stock Repurchase

1998 was a year of unprecedented stock market growth, particularly in the technology industry. Investors small and large had seen the worth of technology stocks such as IBM dramatically increase in value. This often caused investors to fail to ask why a stock's price was increasing so swiftly. At the time it announced a historically large stock buyback, IBM's sales and profits were relatively flat and the company had not announced any new products or promotions. The real, long-term future value of the company had not improved. There was no real correspondence between the increase in sale price generated by the buyback and actual value of the corporation (Geralds 1998). However, when a company repurchases its own stock, it increases investor's earnings per share on paper. This critical figure is used by analysts when they evaluate a company's performance. Thus IBM as a company looked like a much better investment, purely because of the buyback.

At the time, the buyback was critiqued, as it did not generate jobs or real value. But Wall Street was buzzing, given the focus on paper wealth and day-trading during the dot.com boom. Even analysts were giddy at the seemingly ever-higher escalation of the stock market and the value of IBM. Traditionally IBM did not pay back much money in the form of dividends to shareholders (Geralds 1998). For investors, IBM's decision to buy back shares increased their profits because the pieces of 'pie' shared by all investors increased proportionately (Eisenstader 1998, p.1). Buybacks are an effective way to reduce the economic effects of generous stock option programs for employees, as well as to reduce the tax burden for shareholders receiving the windfall, as capital gains from buybacks are taxed at a lower rate than dividends (which are taxed as income) (Hurtt 2008, p.1).

IBM's decision was largely designed instead to generate greater positive views amongst investors who only looked at stock values such as earnings per share, rather than real earnings or company product lines. Because of the sudden abundance of wealth, IBM shareholders were also apt to overlook the negative, potentially company-destroying behavior of CEOs. Although the money could have been better spent upon reinvesting it in the company or R&D, the CEO's generous compensation package provided him with stock options, which meant that he stood to immediately profit from an increase in stock price in a personal fashion.

Investors should be more wary today. It would be expected that a similar announcement by Intel would not bring forth such a fevered response. The dot.com bubble has burst and dissipated, and in its wake consumers are more wary of techniques to inflate stock value on paper. In 2005, Intel attempted a similar technique as IBM. However, the slightly more skeptical business press was quick to point out the 'fancy math' behind the move. Noting, Intel had only reduced earnings per share on paper, because of the increase of profits accorded to investors, with little real increase in wealth. BusinessWeek's 2006 article on Intel's buyback scheme was entitled: "The dirty little secret about buybacks."