Forum Home Page [see Broadridge note below]

 The Shareholder ForumTM`

Fair Investor Access

This public program was initiated in collaboration with The Conference Board Task Force on Corporate/Investor Engagement and with Thomson Reuters support of communication technologies. The Forum is providing continuing reports of the issues that concern this program's participants, as summarized  in the January 5, 2015 Forum Report of Conclusions.

"Fair Access" Home Page

"Fair Access" Program Reference


Related Projects 2012-2019

For graphed analyses of company and related industry returns, see

Returns on Corporate Capital

See also analyses of

Shareholder Support Rankings


Forum distribution:

Buying short term stock price at expense of long term enterprise value



Source: New York Times DealBook, October 20, 2014 column

DealBook Column

The Truth Hidden by IBM’s Buybacks

By  ANDREW ROSS SORKIN    October 20, 2014 8:58 pm

Virginia Rometty, IBM’s chief, has followed a plan set by her predecessor, inflating IBM’s earnings per share with stock buybacks and large dividends. Yoan Valat/European Pressphoto Agency

For many years, the International Business Machines Corporation’s earnings glided smoothly upward. Every quarter, IBM would report higher earnings per share. Even Warren Buffett invested in the company, disregarding his long-held aversion to technology companies as too challenging to forecast.

Virginia M. Rometty, IBM’s chief executive — and recently anointed the most powerful woman in business by Fortune magazine — has talked a good game about focusing on “shareholder value.” For the first several years of her tenure, she managed to prop up the stock by buying back shares by the cartload. In the first six months of this year, the company spent more than $12 billion — that’s billion with a “b” — on its own shares. She’s also been sending shareholders thank-you presents in the form of large dividends.

But all these “shareholder friendly” maneuvers have been masking an ugly truth: IBM’s success in recent years has been tied more to financial engineering than actual performance.

That became readily apparent Monday morning when the company announced its earnings, missing analysts’ expectations by a wide margin. The stock fell more than 7 percent to $169.10 by the end of the day, below the average price Mr. Buffett paid since he started buying the stock in 2011.


The company’s revenue hasn’t grown in years. Indeed, IBM’s revenue is about the same as it was in 2008.

But all along, IBM has been buying up its own shares as if they were a hot item. Since 2000, IBM spent some $108 billion on its own shares, according to its most recent annual report. It also paid out $30 billion in dividends. To help finance this share-buying spree, IBM loaded up on debt.

While the company spent $138 billion on its shares and dividend payments, it spent just $59 billion on its own business through capital expenditures and $32 billion on acquisitions. (To be fair, Ms. Rometty has been following a goal set by her predecessor, Samuel J. Palmisano, to return $20 a share to stockholders by 2015. Ms. Rometty abandoned it only on Monday.)

All of which is to say that IBM has arguably been spending its money on the wrong things: shareholders, rather than building its own business.

“IBM’s financials make it self-evident that its stock-rigging strategy is not about value creation through ‘investment,’ ” David A. Stockman, the director of the Office of Management and Budget under President Ronald Reagan and a banker on Wall Street, wrote on his website earlier this year. “IBM is a buyback machine on steroids that has been a huge stock-market winner by virtue of massaging, medicating and manipulating” its earnings per share.

The buybacks and dividend payments have managed to keep activists and vocal hedge-fund investors at bay — at least so far. But if IBM’s performance doesn’t turn around, and soon, Ms. Rometty may face a mini-mutiny.

Ms. Rometty is a well-regarded manager who is facing an uphill battle that is not of her own making. Most of the old-line enterprise technology companies, including Hewlett-Packard, are in a challenging environment as their clients become less dependent on traditional services and move into “the cloud.” And the cloud’s profit margins are far slimmer.

Ms. Rometty has signaled that she is trying to reposition IBM for the future, and she has taken substantial steps toward that goal.

But like some of her competitors, she appears to be late. And, unfortunately, shareholders weren’t vocal enough early on because they were too focused on the rising stock price and the dividend payments that made the company appear so healthy.

Let’s be clear: IBM is not going out of business. Far from it. It has substantial cash and access to the debt markets. Its turnaround strategy is underway. The big question is whether the turnaround will be successful.

Of course, there’s also the question of what IBM should have done with all that cash burning a hole in its pocket. Well, what about a major game-changing acquisition?

Ms. Rometty has made a number of deals, but most have been incremental.

Investors and analysts suggested big, transformative transactions like buying, putting IBM squarely in the cloud. Or Workday, another enterprise highflier. Or a major online security company.

The history of stock buybacks is decidedly mixed. Some of them turn out to be great winners, others losers. It’s all about timing.

There’s also a dirty secret about why some executives love stock buybacks: In certain instances, they can have an impact on executive compensation by goosing certain metrics that boards use to measure a company’s performance.

Of course, as in any story, there’s another side. In this case, it is Mr. Buffett who has espoused the other side of the argument in favor of stock buybacks.

Mr. Buffett has contended that stock buybacks can be a terrific tool for creating value, in part by shrinking the pool of shares for sale. In his 2011 annual letter, he specifically pointed to IBM and declared: “We should wish for IBM’s stock price to languish throughout the five years.”

His rationale?

“If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion,” he wrote. “There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.”

So yes, Mr. Buffett is right that stock buybacks can be effective at creating value, especially if the company buying back its shares can do so on the cheap.

But Mr. Buffett’s theory becomes more complicated, to put it politely, when the company, like IBM, appears to be in decline.

In Mr. Buffett’s letter, he wrote that “In the end, the success of our IBM investment will be determined primarily by its future earnings.”

The question for Ms. Rometty is whether she can figure out how to turn around IBM — not just its numbers, but also the company itself.

Andrew Ross Sorkin is the editor at large of DealBook. Twitter: @andrewrsorkin

A version of this article appears in print on 10/21/2014, on page B1 of the NewYork edition with the headline: The Truth Hidden by IBM’s Buybacks.

Copyright 2014 The New York Times Company



This Forum program was open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the purpose of this public Forum's program was to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant was expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated in 2012 in collaboration with The Conference Board and with Thomson Reuters support of communication technologies to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices. The website is being maintained to provide continuing reports of the issues addressed in the program, as summarized in the January 5, 2015 Forum Report of Conclusions.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.