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July 31, 1997updated 03 Sep 2016 8:19pm

WHY DID IBM SPEND BILLIONS BUYING ITS OWN SHARES?

By CBR Staff Writer

By Andy Lawrence

If IBM shares are a good investment for IBM Corp, why are they not also a good investment for its senior executives? This is a question which, during the coming year, may come to haunt IBM’s chief executive, Lou Gerstner, and at least six other executives. After IBM announced its second quarter results last week, some analysts suggested that the company ought to pay more attention to computer engineering and less to financial engineering. They noted that once again, IBM boosted its earnings-per-share figure for the second quarter by buying some $1.6bn of stock at inflated prices, and then taking them out of circulation. Without the buyback, earnings per share would have been flat on a year ago. In fact, during the past year and a half, IBM has reduced the number of shares in circulation by 8% and spent some $14.4bn. If IBM’s shares continue to rise, then this $14.4bn – money which could have been spent on R&D or on reducing prices – will look like money well spent. But are IBM executives sure that the stock will not go the other way? According to an analysis of IBM inside trades by IBM watcher Bob Djurdjevic, president of Annex Research of Phoenix, Arizona, Lou Gerstner and six other executives sold $28m worth of IBM stock during the second quarter through the exercise of stock options. The sales yielded a pre-tax profit of $13m. In the two previous quarters executives exercised options and sold shares worth $33m, yielding profits of $15m. The top sellers in the second quarter were Gerstner ($4.8m worth of stock), John M Thompson, head of software ($14m), and head of human resources Tom Bouchard ($3.4m). Djurdjevic argues that selling on this scale – and at the same time as a corporate stock buy back program – is unprecedented in the history of IBM and would certainly have been frowned upon by earlier managements. He points out there is a clear conflict of interest – a scam on a par with a homeowner bidding against prospective buyers to raise the price of his/her property. He argues: Perhaps we need new legislation to prevent such self dealing abuses. In theory, stock buy backs should not directly affect the stock price, since the transaction represents a move from cash holdings to equity holdings on the balance sheet. But the buy back gives a strong signal to investors that the stock is worth buying. IBM argues the stock buy back program has no direct effect on share price, and that the exercise of stock options is a routine and a personal matter. Independent stock market analyst Adam Page agrees, saying: The two should not be linked. But, he adds, the significance of directors stock sales depends on the size of their total holdings.

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