I have spoken in this blog about Financial Machinations. These are actions taken by management to manipulate the financial results in order to make the Success Formula look better than it really is. In short, financial accounting provides so much flexibility for how to “book” things that it is possible for any business leader to manipulate revenues, expenses and assets from quarter to quarter without breaking any rules (auditors will approve the changes) or laws. Beyond these accounting manipulations, there also exists manipulation of the company growth rate and earnings per share by simply reporting quarter to quarter numbers without highlighting critical adjustments – such as an acquisition that inflates revenue or a stock buyback that reduces the number of shares.
IBM (see chart here) gives us an example this week. While IBM is a great company with a rich history and actually quite a bit of White Space, this week the company announced it will use classical financial machinations in an effort to protect its Success Formula (see article here). Shareholders benefit when companies pay dividends, or when the share price goes up. IBM announced it was going to borrow money in order to buy back shares. This means that without any change (better or worse) in the company’s ability to address market Challenges the earnings per share can be manipulated by leadership simply by deciding to buy additional shares – using borrowed money (in other words, without affecting operating cash flow).
This is a warning sign. When companies do well, management does not need to manipulate financial results. The only reason to undertake such an action is to protect the existing Success Formula. In IBM’s case the company’s most recent earnings announcement (last week) saw earnings increase in North America only 1%. Even Gartner (the notable analysts that cover technology companies) showed concern over these results stating “There are mixed signals about how much businesses are prepared to lay out for new technology initiatives.” (see article here)
IBM is not alone. In the last year such notable companies as Microsoft, Hewlett Packard and Motorola have all undertaken similar actions to increasing a pond of funds for buying back shares in order to manipulate earnings per share and stock price. In the last year, stock buybacks doubled increases in dividends. And the S&P 500 spent more on share buybacks ($432billion) than the U.S. government spent on Medicare (see Chicago Tribune source article here.)
In these days of financial transparency, augmented by the internet, such manipulations are unnecessary. They indicate companies that are interested in Defending & Extending their Success Formulas. Phoenix Principle companies are focused upon market Challenges and addressing them with White Space to remain evergreen.