$6billion – that’s how much today’s economy paid for ….. nothing. IBM (see chart here) announced today it would add $15billion to its share buyback fund (read Marketwatch article hear). This fund is used to repurchase shares of Big Blue, and top executives said they intended to spend $12billion buying back their own shares this year. The fund, according to IBM’s Chief Executive is "one of they key elements of IBM’s 2010 road map for earnings per share growth."
When a company buys back its shares it does not increase sales, or earnings. It merely buys back its own equity. The number of manufacturing plants, patents, or products does not go up. The number of salespeople, or other employees does not go up. All that happens is the total sales and earnings is now divided by a smaller number of shares. Earnings per share increases – not because the company is doing any better – but rather because the denominator was manipulated to a smaller number.
Note that as the amount being spent to buy shares was announced at $12billion, the amount of value increase was only half that – $6billion. Right off, we should recognize that some investors see this for what it is. Financial machinations that provide no real value. Instead of IBM saying it was opening a White Space fund to spend $15billion on new markets, new technologies, new projects it is spending the money on financial manipulations that have no inherent value. And what is that worth? Well, investors said about half of the amount promised to be spent.
Investors should be worried about this kind of announcement. Firstly, it says management is focused on financial machinations – rather than actually growing sales and earnings. That is not a good thing. Secondly, it implies that management has so few investment opportunities that it is going to spend money on stock buybacks. Again, not a good thing. Investors should prefer that the company would have so many new product investment opportunities that it is having to allocate cash amongst them – rather than give the cash to existing shareholders in an effort to buck up the share price. It’s an indication that the company lacks growth opportunities when it buys shares rather than buying new capital equipment to make new products, or new salespeople to meet customer needs.
The front page of Marketwatch.com excitedly announced the $4.30 jump in IBM’s shareprice as a result of the announced buyback. You would have thought some great new innovation had been launched. Instead, this was much ado about nothing – and a real risk to a company that requires high amounts of Disruption and White Space to maintain growth.