Reuters Investigates: The Cannibalized Company
Excerpts:
"Share repurchases have helped the stock market climb to records from the depths of the financial crisis. As a result, shareholders and corporate executives whose pay is linked to share prices are feeling a lot wealthier.
That wealth, some economists argue, has come at the expense of workers by cutting into the capital spending that supports long-term growth – and jobs. Further, because most most U.S. stock is held by the wealthiest Americans, workers haven’t benefited equally from rising share prices.
Thus, said Lazonick, the economics professor, maximizing shareholder value has “concentrated income at the top and has led to the disappearance of middle-class jobs. The U.S. economy is now twice as rich in real terms as it was 40 years ago, but most people feel poorer.”and,"IBM has been among the most explicit in its pursuit of higher per-share earnings through financial engineering. In 2007, in communications with shareholders, it laid out the first of its “road maps” for boosting (eps), this time to $10 a share by 2010. It would do so, under the plan, through equal emphasis on improved margins, acquisitions, revenue growth, and share repurchases. It easily met its expectations.
In 2010, then-CEO Sam Palmisano doubled down, pledging to boost earnings by more than 75 percent to $20 a share by 2015. This time, more than a third of that increase was expected to come from buybacks. Palmisano left in 2011, having received more than $87 million in compensation in his last three years at the company.
For a while, the plan worked. Shares surged to an all-time high of $215 in March 2013. But the company’s operating results have lagged.
Revenue has declined for the past three years. Earnings have fallen for the past two. The stock is down a third from its 2013 peak, while the S&P 500 has risen 34 percent. To rein in costs, IBM has cut jobs. It now employs 55,000 fewer workers than it did in 2012."special-report/usa-buybacks-cannibalized/
Comments
Investors may expect to get a little more back in the form of equity repurchases.
“But they shouldn’t count on it,” Arends says. “Companies have a terrible record of buying back stocks at the wrong time.
“More importantly, while they buy back stock with one hand, they issue lots more to the [chief operating officer] and other favoured insiders with the other. The net effect is that overall share counts go down a lot less than you expect–and... may actually go up.”
and,
Because of the bizarre environment created by the Fed, US corporate treasurers have enjoyed a no-brainer: borrow money by issuing bonds, then use the proceeds to finance share buybacks. It’s much less risky than making capital investments.Of course, it doesn’t produce any job creation. But it’s great for executive bonuses.By reducing the number of outstanding shares, buybacks raise earnings per share even when there is no improvement in revenue or profit margins. Commentator John Plender says this “leads to bonuses and other equity-related incentives based on performance yardsticks such as earnings per share and return on equity that bear no strict relation to value creation.”