Executives

From Ibmer

Questioning the strategy of Share Buybacks

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's recent announcements (e.g. April 24, 2007 at Bloomberg) shows that IBM's finance 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.'