Executives

From Ibmer

Current revision as of 07:44, 20 May 2007

IBM executives as perceived by Financial Analysts

'Cramer said Big Blue chief Sam Palmisano is on "a permanent intellectual vacation" and that the stock could easily drop 20% from a recent $94.50 if a new leader isn't selected.' ^X6

IBM executives as perceived by Bloggers

Bloggers are increasingly characterising rank-and-file employees as downtrodden, and executives as greedy and uncaring. For example:

Zappatero^X3 wrote May 4th, 2007:

'There are two classes of employees at IBM:

• the executive class whose members, regardless of their performance (usually poor), get raises, bonuses, promotions, stock grants and other perks, and
• the worker class whose members, regardless of their performance, if they're lucky, get no raises, minimal bonuses, benefit cuts, no promotions, stock options and if they're unlucky, get a pink slip.

'In short, the executive class gets all the gold, while the worker class gets only the shaft—after they've mined the gold for the exclusive benefit of the executives.

'These layoffs are not about the performance of the workers or the lack of work—it's all about an incessant, anorexic (insane) drive to cut costs to make the short-term results look good.

'Everything ill with the company is a result of the arrogant, unethical, uncaring, self-serving, clueless, short-term focused executive leadership.'

Realist^X4 wrote May 7th, 2007:

'Once about half of the company will be offshore toward the end of 2007 when the tipping point is reached, and the rest of the company is rapidly washed away. At least 100,000 employees will lose that status, and retirees are going to find themselves on fixed incomes when their pension plan is frozen. But it isn't just the work force that is being hammered. Customers dependent on IBM services just might find themselves left behind as well, due to the abandonment of low-bid contracts that don't make IBM any money.

'The beneficiaries of this scorched-earth downsizing are the top executives of IBM, and those shareholders who hold enough stock to realize major increases in the price-per-share as these thousands of employees lose their wages and benefits. Combine this with a major reduction in unprofitable customer service, and that number should be huge.'

How did it come to this? Why is it that the old IBM—the IBM which created the hard disk, Personal Computer, Selectric typewriter, and made outstanding contributions to the US space program—flourished by nurturing its employees and their families, whereas the current breed of IBM executive believes the company's best interests are served by screwing down employees as much as possible?

IBM's choice of venue for the annual shareholders' meeting

'IBM chose the Knoxville Convention Center as the site of its annual stockholders meeting. About 150 spectators were on hand Tuesday, not counting the dozens of IBM employees in town for the event. IBM ... says it moves the meeting around each year to make it accessible to new groups of shareholders. Lee Conrad, a national coordinator for the IBM employees' organization Alliance@IBM, suggested another motive for the regional meetings.

"They tend to go to areas without a large amount of employees or retirees," Conrad said. "There's a reason for that. They want to keep the uproar to a minimum." ^X7

The Focus on Earnings-per-Share as the Ultimate Good

From Business Week (May 2007)^X5:

'Addressing a daylong briefing at IBM's research labs in Yorktown Heights, CFO Mark Loughridge laid out what he called a "road map" for earnings per share to rise from $6.11 last year to as much as $11 in 2010.

"I think the road map ... gives us a lot of confidence in our business model," he said.

'Of the roughly $5 increase in earnings per share that IBM says is possible by 2010,

75 cents comes from the assumption that IBM's recent growth rates will continue.

IBM sees another $1 coming from wide-ranging efforts already underway to cut costs and boost profit margins;

$1.10 from more than $40 billion worth of stock buybacks;

$1.20 from acquisitions and other future growth initiatives; and

90 cents from retirement-related savings. IBM is freezing accruals in its pension plan after this year.

Earnings-per-Share is a flawed metric because it encourages destructive Share Buybacks.

With this concise summary, Loughridge illustrates the flaw in the EPS metric. As explained below, buying back the company's stock is a mechanical process that adds little to the company's business value. Yet by reducing the company's outstanding shares, it clearly reduces the denominator in the earnings-per-share calculation.

Questioning the strategy of Share Buybacks

There's a (small) tax incentive.

IBM was one of the first firms to re-purchase its stock in 1974—the company had found itself with more cash than it needed^X1.

But should a firm return this excess cash to shareholders via a share re-purchase or via dividends? The distinction between re-purchase and dividends lies in the tax treatment:

• Shareholders who sell shares back to the firm pay tax only on capital gains realized in the sale.
• Dividends are taxed as ordinary income.

But by 2005 McKinsey admitted that the tax advantage of share buybacks was 'small'.^X2

Buybacks send the signal that the firm has excess cash and few (if any) investment ideas.

An article in The McKinsey Quarterly 2005 Number 3 spells out the pros and cons of re-purchasing shares:

'... buybacks an alluring substitute if improvements in operational performance are elusive ... Investors are generally relieved to learn that companies don't intend to do something wasteful—such as make an unwise acquisition or a poor capital expenditure—with the excess cash ... A second positive signal is management's confidence that the company doesn't need the cash to cover future commitments such as interest payments and capital expenditures ... But there is a third, negative, signal with a buyback: that the management team sees few investment opportunities ahead, suggesting to investors that they could do better by putting their money elsewhere ...'

'... by allowing management compensation to be linked to EPS, boards run the risk of promoting the short-term effects of buybacks instead of managing the long-term health of the company. Similarly, value-minded executives in industries where good investment opportunities are still available must resist the pressure to buy back shares in order to reach EPS targets.'

'Only when boards and executives understand the difference between fundamental value creation through improved performance and the purely mechanical effects of a buyback program on EPS will they put share repurchases to work creating value.'

But IBM doesn't have enough excess cash.

But IBM's recent announcements (e.g. April 24, 2007 at Bloomberg) shows that IBM's strategy people are so enamoured with share buybacks that the company will borrow money to finance the buyback:

'... IBM plans to take on debt to finance much of the buyback and probably won't be able to sustain this repurchase level in the future, Treasurer Jesse Greene said today in an interview.'

So in IBM's case, there isn't the excess cash, whose misuse investors could be concerned about.

Further Reading

• For a well-written but apocalyptic view of the ultimate consequences of the increasing portion of the world's income taken by the richest 1% (including Palmisano), see Is Economic Armageddon Coming?.

Sources:

• X1. Principles of Corporate Finance. Brealey and Myers (McGraw-Hill 1984)
• X2. The McKinsey Quarterly 2005 Number 3. Dobbs and Rehm (2005)
• X3. The Death of IBM at Square State
• X4. The Terror-able Truth About Globalization Blog Critics
• X5. IBM eyes big profit bump by 2010 at Business Week
• X6. Jim Cramer's Stop Trading! at The Street.com
• X7. IBM's road show stops in Knoxville at Knox News (April 2007)