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Big Blue's Big Sam gets $10bn for bonus stock boost

IBM wastes cash, sidelines innovation

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Comment IBM needs to hit at least $11.40 in earnings per share for the company's top brass to get their 2010 bonuses, so on Tuesday its board of directors gave Sam Palmisano, Big Blue's president, CEO, and chairman, the means to engineer that number with a $10bn bag of cash.

The board declared a dividend of 65 cents per share on IBM's stock while also authorizing the company to spend an additional $10bn to take them off the market and "return value to shareholders" — the IBM euphemism for not giving employees a pay raise.

IBM has $2.3bn remaining in prior authorizations to buy back its own shares from the open market. That's a pretty big pile of cash to throw at stock to artificially boost earnings per share (EPS), as many companies do, especially when you consider that IBM has only $11.1bn in cash and marketable securities on hand as of the end of September, and that it has $27.5bn in debt.

Yes, a lot of that debt has to do with the financing IBM does for its channel partners and for end-user customers who lease its gear. In fact, the Global Financing portion of IBM's debt was a honking $22bn at the end of the last quarter, with "real" debt at $5.5bn. This is more than double that of a year ago.

It is not clear where IBM has its cash stored, but given that IBM doesn't touch it and that it even went so far as to borrow money to do a massive buyback a few years ago, you have to believe that a large portion of it is locked up in overseas subsidiaries where Uncle Sam's tax hounds can't feast upon it.

And thus, IBM has been burning through the cash it generates each quarter to satisfy its share-buyback habit. IBM has generated $12.7bn in cash from operations in the first nine months of the year, and thus far has spent $11.8bn on its shares and another $2.37bn on dividends in those three quarters.

This from a CEO who balked last year at the $5.6bn net-of-cash price for Sun Microsystems, and who admits that the acquisition has made Oracle the biggest headache IBM faces in its future.

It seems unlikely that Palmisano or his top brass will retire any time before 2015, unless something dramatic — and awful — happens to IBM's business. That means IBM will continue burning cash to buy back shares to prop up EPS. IBM's long-term plan, as El Reg revealed back in May, is to double EPS to at least $20 per share.

Palmisano told Wall Street analysts in May that over the next five years IBM will generate $100bn in free cash flow, and will return about $70bn of that to shareholders in the form of share buybacks ($50bn) and dividends ($20bn), and the remaining $30bn for acquisitions, increased R&D, and so forth. The plan is to do around $20bn in acquisitions and to cut $8bn in expenses.

With IBM's shares trading at an all-time high (and one would argue from that relatively rosy five-year plan), one might argue that stock buybacks are the worst possible way to return value to shareholders. Building businesses that are profitable is tough, and to one way of thinking about it, IBM really screwed up by getting out of the hardware business (except in data centers), and missed the entire consumer IT revolution that's now underway. Apple generates almost as much revenues as IBM at this point, throws off more cash each quarter, and is on a steadily rising wave of consumer enthusiasm for its products.

The IBM that Larry Ellison says he admires is the one run by Tom Watson Jr — the one that hated Wall Street. That company only went to the Street to borrow money because the revolutionary System/360 mainframe line that defined corporate computing, launched in 1964, needed $5bn in investment to create — and that was at a time when IBM's annual sales were $3bn.

That move was one of the biggest bets in the history of capitalism — and I am not counting the horseshit that goes on in hedge funds, which basically comes down to shorting the market to cause it to crash so Wall Street gamblers can make money while you and I keep pumping the market back up again with our 401(k)s. It's the inverse of buying up your own stock to pump up EPS — as if that number means anything once you start artificially engineering it.

As funny as this might sound, the last time IBM had a product that its corporate customers liked as much as normal people like Apple's iPad was the AS/400 back in 1988. And IBM has screwed AS/400 customers so many times that it's amazing that there are still somewhere north of 100,000 shops using the box. That's a testament to some good engineering if there ever were one. OK, so the ThinkPads were pretty good, too.

Maybe the top brass at IBM might want to give its customer relationships a good hard "THINK" like ol' Tom Watson used to admonish them.

Share buybacks are what companies do when their stock is in the gutter because their business is on the rocks, and when they have a lot of cash sitting around. It is what companies do when they can't figure out what else to do to feed the Wall Street beast. Perhaps the answer is to let it starve and instead go and create great technology.

There will be four quarters of hell to live through (at least) once you go down the more-creative road — but by then, you're down that road and you can't hear the moneymen yapping any more. Maybe you can even hear yourself think. ®

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