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FINANCIAL

IBM's 1997 Annual Report Looks Very Hip; But Is It Really...

the new blue?

Or a Madison Avenue Mirage?

"the new blue" is black. And white. And lean. And young. And pretty. And hip...

The preceding are some messages which a cleverly designed cover of IBM's 1997 Annual Report exudes. Good marketing. But as that old adage goes, one should not judge a book by its cover.

So leafing on through the IBM 1997 "blue book," once one gets past the pretty IBM B&W models, one gets to a full page color image that says it all: "Sitting pretty" should have been the caption above photo of Lou Gerstner perched atop a window ledge in his office (see page two).

And why wouldn't Gerstner be smiling. He's coming off a year in which the IBM Board awarded him with $91.5 million in direct compensation, according to an April 5 report by the New York Times. Who says that mediocrity doesn't pay?

No, we are not talking about IBM's chairman being mediocre. Quite the contrary. No one who has conned as many people as Gerstner has in the last 18 months can be described as mediocre. We are talking about IBM's mediocre 1997 business results (see Annex Bulletin 98-15, 3/28/98 for details).

Score more con points for Gerstner. Guess who appointed all three IBM directors who comprise the Board's Executive Compensations Committee? We won't insult your intelligence by answering this rhetorical question explicitly.

 

 

 

 

 

 

 

 

 

Insiders Sell As Company Buys

It didn't take long for the once pristine Big Blue insiders to take a clue from their chairman's behavior that the time of Greed has arrived at Armonk, as elsewhere in Corporate America. In the last 18 months, the period of unprecedented IBM hype and backed up by nearly $11 billion in stock buybacks, the insiders sold some $78 million-worth of the Big Blue stock, mostly by exercising their stock options, for a $34 million-gain.

So as IBM was buying big time, insiders were selling big time.

Incest? Maybe on America's Main Street. But not on Wall Street. Or at "the new ibm" Armonk. Wall Street is well past incest, and into cloning of the next generation of moral degenerates. Guess there is no such thing as a conflict of interest in a world ruled by Greed?

Why Is Nobody Buying?

Even more telling of the El Grande Con job which Gerstner, the IBM Board and the Big Blue's executive team have done on the investing public in the last 18 months or so, comes from the latest Vickers Insider Trading report about IBM, which we have just finished analyzing.

Remember the old adage - "putting your money where your mouth is?"

Well, no one is doing it at Armonk. There has not been a single IBM executive who has BOUGHT shares of the company which pays his/her salary in the last three quarters, according to Vickers. That's some vote of confidence for Gerstner's IBM by his lieutenants!

The only exceptions are the newly appointed Board member, Minoru Makihara, president of Mitsubishi Corp., who bought a token 500 shares so he could serve on the Board as a shareholder; and Dave Thomas, and IBM executive, who acquired an even smaller token of 400 "indirect" shares, meaning they were for a family member or a trust.

Meanwhile, the same IBM executive (Thomas) led all his peers in stock option sales during the last three quarters. He disposed of 73,273 shares worth nearly $7 million for an estimated pretax gain of about a $1.5 million during that relatively quiet period, for IBM insider selling.

He was followed by John Hickey, the Board's secretary, Ned Lautenbach and Dennie Welsh, both senior IBM vice presidents, who had sold $4.4 million, $2.9 million and $1.5 million-worth of IBM stock options respectively.

So, if nobody's buying, and some are selling their IBM stock, what are we, the mere Main Street mortals to conclude from such actions by the IBM brass?

Once again, we won't insult your intelligence with an explicit answer.

Stock Buybacks a Boon?

Meanwhile, the Business Week alleged that "The (stock) buyback boom is mostly a boon" (BW, 4/13/98, Christopher Farrell's column). And it is. For the top executives of the nation's largest companies and their Wall Street cronies, as you could plainly see from the preceding data. As for the rest of the Americans, it is a scam; a con, a Ponzi scheme - take your pick.

Here's a simple common sense test. How many Main Street jobs did Corporate America create by spending $180 billion (the BW figure) in 1997 buying back its stock?

Answer: Zero!

In other words, several dozen smaller countries'-worth of GDPs has been poured down the drain by Corporate America without creating a single job or a product!?

Ah, but some "experts," such as economist Mark Zandi, quoted in the BW story, argue that stock buybacks are a way big companies (like IBM) return cash to "millions of shareholders" who "get money going... to thousands of Yahoos."

The statement is pure and undiluted hogwash! Which only a Wall Street hog or a whore could swallow as truth. First, because it is factually unsupportable. Second, because it is highly speculative.

It is factually unsupportable because less than one-third of Americans play at the Wall Street Casino despite its long "bull run" and decades of financial hype. Of those, about three percent account for three-quarters of the individual investment portfolios' value.

It is also factually unsupportable because even those three percent of individual shareholders' portfolios fade in comparison to those owned by institutions. The major stockmarket players are the Wall Street cronies of the "blue chip" companies' CEOs. In IBM's case, institutional investors account for more than half of its stockholders and for a huge share of its trading volume.

The Main Street investors - implied by Zandi's "millions of shareholders" comment - are the patsies who pay for the privilege of watching the Big Money changing pockets. Kind of like the tennis match spectators' heads turning left and right, as Wall Street's "buy side" and its "sell side" trade shots over the NYSE "Intranet" using the target company's cash as the ball.

IBM's stock, for example, has doubled in price in the last 20 months even though most of its business fundamentals are either down or declining. Like a hot air balloon, the Big Blue shares rose on Wall Street analysts' hot air-fueled forecast, supported by an $18 billion-and-counting share repurchase program.

Just in case the magnitude of this Big Blue con is lost on the BW readers, that's about four Albanian GDPs-worth. Yet IBM is only one of the many Wall Street and Corporate America hucksters duping the Main Street public.

The BW claim is also highly speculative because there is no evidence whatever, of which we are aware, which supports the BW columnist's and his "expert" source's claims - that IBM's stock buyback money ended up in Yahoo's IPO shareholders' pockets, for example.

If BW possesses such proof, it ought to make it public. Or else retract such statements and refrain from hyped-up propaganda in the future. Unless the media want to be charged as accomplices when the sky falls in, and when the Main Street America takes Wall Street and its corporate cronies to account for their Ponzi schemes.

Unlike the above, shooting-from-the-hip-type BW speculation, a solid case can be made that the Big Business executives raked it in Big Time, as you saw from our above insider trading analysis.

But there is at least one aspect of the BW column, which rings true. It's the part which says that "companies are saving their shareholders billions in taxes by buying back stock rather than simply increasing the dividend" (in which EVERY shareholder would equally participate). "Dividend payments... are taxed twice," he said. "In sharp contrast, shareholders who decide to sell their stock are often taxed at the much lower capital gains rate."

If true, the preceding allegation should merely serve to indict the American lawmakers in the court of public opinion as co-conspirators in this Wall Street scam.

Because if corporate investors are getting off lightly on their taxes, guess who has to pick up the slack. The Heartland America, of course, America's Main Street.

Happy bargain hunting!

  Bob Djurdjevic

Additional Charts

  • No buyers of IBM stock among insiders (in last 3 qtrs.)
  • IBM revenues 1912 through 1997
  • Watson Jr.'s years: The best
  • Akers' years: The worst
  • Cumulative IBM earnings - by CEO (1912-1997)

Tables

  • IBM revenue and earnings summary - by decade
  • IBM revenue and earnings summary - by CEO
  • IBM insiders' trading summary (July 1, 1997 - Mar. 31, 1998)
  • IBM insiders' trading summary (Oct. 1, 1996 - Mar. 31, 1998)
  • IBM historical data: Revenues/earnings - 1971 through 1997

Are you eager to learn more? If so, please call 602/824-8111.

Also check out Annex Bulletins "Wag the Big Blue Dog" and "Solid Third Quarter Despite Trying Circumstances."








Volume XIV, No. 98-16
April 7, 1998

Editor: Bob Djurdjevic
Published by: Annex Research;
e-mail: annex@djurdjevic.com

5110 North 40th Street,      Phoenix, Arizona 85018
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