It used to be that corporations made their money the old fashioned way-they would earn it. Now is seems that financial and accounting engineering are the only way that corporations can proclaim an improving bottom line. If having 20 million shares outstanding doesn’t do the trick, then simply reduce, by buying back, enough shares to reach 15 million. After all isn’t that, according to Carl Icahn and Apple, in the best interest of the stockholder? Him!
If a thousand people are just the right number of employees for your company to be profitable, contribute to the community, and make a good profit, but doesn’t satisfy Wall Street’s expectations, then simply fire half of them. After all isn’t that, according to Warren Buffett, in the best interest of the stockholder? Him!
Stock buybacks and continued downsizing eventually run their course and culminate in either the demise of the company or the collapse of the stock. Perhaps both.
Possibly the most egregious of the buyback villains and layoffs too is IBM. Over the past two years Big Blue has watched falling revenues dramatically impact EPS. No problem, just reduce the divisor by the number of shares outstanding. Borrowing over 33 billion dollars, compliments of the Fed’s ZIRP policy, IBM continues to reduce the share count at the expense of research and development, hiring and overall capital expenditures. All, that would benefit the future of the company.
But all good things have a certain shelf life and Big Blues most recent earnings and projection reports point this out.
For two years Warren Buffett, IBM’s highest shareholder via Berkshire Hathaway, has enjoyed the largess of the buyback fantasy. For one Oracle of Omaha there are hundreds of thousands who do not benefit from the fantasy game, in fact, they actually suffer from it as the companies future is put in jeopardy.
Most markets have a way of catching up with the real economics. The 8% decline in IBM share price resulted in a one day loss for old Warren of one billion dollars. A little bit more than walking around money.
Of course, the Plunge Protection Team, that’s PPT, may ride to the rescue? Warren will espouse confidence in Big Blue, the American way of life, the Federal Reserve and of course financial engineering.
You may even hear him say, like Carl Icahn did with the Apple board, it’s time to up the ante and have IBM’s the board authorize more IBM shares be bought back.
After all, isn’t that in the best interest of the shareholder?