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A Report from IBM's 1997 Annual Meeting

Stock Buybacks Questioned

Yet IBM Shares Rise; Flustered Chairman Misquotes His Own Figures


DALLAS, Texas, Apr. 29, 1997 - "I just checked the stock (price) before the meeting (started), and the stock is up four points," an exuberant Big Blue chairman, Lou Gerstner, told the IBM shareholders assembled at today's 1997 Annual Meeting in Dallas, Texas. 

Applause followed.

Minutes before making this triumphant statement, Gerstner had announced that the IBM Board approved this morning a 14% dividend increase, and authorized another $3.5 billion to be spent on IBM's share buybacks. 

By the end of the day, the IBM stock was to rise more than eight points, and the Dow surged by 179 points for the second biggest daily gain in history.  Yet, while Wall Street cheered, this was a "black day" for America's Main Street.  For, some $17 billion has, or will have, been siphoned from Main Street into the Wall Street investors' purses - without any benefit to our country's economy!

So, during the Q&A period which followed Gerstner's speech, this writer asked the IBM chairman the following question.

"As I stand here before you, I am reminded of the question I asked of one of your predecessors, John Opel, at the Boston Annual Meeting in 1983.  'Why are you mortgaging IBM's future?'"

"I never thought I'd have to ask the same question again.  But here we are, and I do... Lou Vincent Gerstner - 'why are you mortgaging IBM's future?'"

This writer went on to explain that Opel, and later John Akers, tried to create an ILLUSION OF PROSPERITY by selling off the IBM assets, a process we called the "Great IBM Lease Base Sale," to cover up for the shortfall of operational earnings (see Annex Bulletin 91-31, 6/12/91). 

"And we all know how 'successful' they (Opel, Akers) were in the end, don't we?" we asked rhetorically.

"Today, you and this IBM Board are doing the same thing with the stock buyback program," we continued.  "You could have bought hundreds of promising IT companies for the $13 billion of IBM shareholders' money which you've spent on stock buybacks.  And this morning, we've heard that this Board had just approved another $3 billion or so to be spent on additional stock repurchases."

"You even sounded proud of it!?," this writer raised his voice as an exclamation mark, to emphasize the ludicrousness of it.  He then paused for the message to sink in.

At this point, the IBM chairman took a gulp of what presumably was ice water on the speaker's lectern.

"In other words, you and this IBM Board chose to invest in the P/E ratio, rather than the 'E' - the new sources of FUTURE earnings," this writer concluded.

Meanwhile, as you saw in the Annex Bulletin 97-16, 4/23/97, over 80% of IBM's first quarter (1997) gross profits came from DECLINING businesses!  The picture is even grimmer at the pretax profit level. So Gerstner and his Board also opted for trying to create an ILLUSION OF PROSPERITY, just as Opel and Akers did.

"So to summarize... why are you mortgaging IBM's future?  Are you about to quit?  Is the IBM Board about to resign?  And if not - why not?" we fired off a barrage of questions. 

"For, frankly, I cannot see how all of you will be able to face the IBM shareholders in a year or two when things do change," we added.

This time, the IBM chairman opted for a deep breath, rather than another gulp of presumed ice water. 

Gerstner replied, "the amount of money spent on stock buyback program is dwarfed by the amount (of money) we spend on future IBM earnings."

Of the $18 billion per year available to IBM for investments, Gerstner said that $5 billion was spent on R&D; another $5 billion on capital investments; and (some unspecified amount) on other new businesses which IBM bought.

"So I don't see your arithmetic," he concluded.  "It does not add up to ours."

Well, maybe the IBM chairman should follow his own advice to the Dallas students who attended the meeting at IBM's invitation[1], i.e., go back to the three basic "R's" (Reading, Writing, 'Rithmetic).  For, Gerstner's (IBM) 'Rithmetic must be some "new math."  Bad example for kids...

You see, according to IBM chairman's own letter to the shareholders published in the 1996 Annual Report, IBM spent $6 billion in 1996 on capital expenditures, not $5 billion as Gerstner just claimed.

"So what's a billion here... a billion there...," especially when it is someone else's money?

Meanwhile, IBM spent almost the same amount ($6 billion), again according to Gerstner's letter, on stock buybacks in 1996 as it did on capital expenditures. And IBM invested ONLY $1 billion on acquisitions, including a large one - Tivoli - again per IBM chairman's own report. 

So the $6 billion which IBM has spent on stock buybacks in 1996 ($13 billion aggregate to-date) is being "dwarfed" by the $1 billion which IBM spent on acquisitions?

Oh, please...

What Gerstner Wrote

(in IBM's 1996 Annual Report)

"... We ended the year with more than $8 billion in cash - and that's after $6 billion in capital expenditures to strengthen our existing businesses; $1 billion for acquisitions like Tivoli, a leader in systems management software, and Edmark, a leading maker of education software for children; and nearly $6 billion to repurchase IBM common stock."

Gerstner's faux pas regarding the facts about his company was stunning.  Especially given what he himself had written only a few weeks ago (see the above box).  You'd think that a person who received over $80 million in compensation in 1996, according to a Business Week estimate, would at least be able to recall that!  Or be able to tell which is bigger - $6 billion or $13 billion versus $1 billion?  Maybe he was flustered...

But that evidently didn't worry Wall Street too much, where some analysts rushed to defend IBM's stock buyback.  After all, the facts or the truth aren't really in great demand in the Magic Kingdom a.k.a. Wall Street.

IBM/Wall Street $17 billion; America/Main Street 0

Meanwhile, Wall Street's applause clearly defined where Gerstner's loyalties lie.  It is to Wall Street, not to Main Street (where the Watsons started the company), that Gerstner and this IBM Board are loyal, notwithstanding the IBM chairman's proclamations about how many jobs IBM has created, or how much fun it supposedly is to work at IBM today. 

For, let's ask ourselves (and him) this question: How many jobs did IBM create in America (or in the world, for that matter), for the nearly $13 billion which it has spent buying back its stock, or the additional $3.5 billion which it is about to spend on it?


So the U.S. economic scoreboard reads:

IBM/Wall Street $17 billion; America/Main Street 0.

Perhaps more than anything else that an observant Dallas student might have learned at today's IBM Annual Meeting, it is this message about what's wrong with America today.  A company is allowed to pull $17 billion out of productive economic use, and transfer it into Wall Street investors' pockets.  The depth of perfidy by the few financial plutocrats who have devised this clever, yet devious, scheme - is truly amazing.  Everybody, even the Main Streeters present at the meeting, cheered this squandering of capital (!?), instead of calling for our elected politicians to OUTLAW such scams.  Even the Albanian pyramid sham looks like child's play by comparison.

Lest you forgot, that was $17 billion of REAL money that IBM spent without creating ANY REAL benefits to the country's economy!  America/Main Street didn't even get the crumbs.

So how long will the IBM/Wall Street party last? 

Who knows... If the past track record is any indication, there is no reason to ditch the IBM stock fast.  After all, four and a half years after this writer asked John Opel that 1983 question about "mortgaging the IBM future," the IBM stock hit its ALL TIME HIGH! (in August 1987).

So much for REASON or COMMON SENSE having much to do with Wall Street!

Based on the sugar-coated, congratulatory messages which Gerstner received from the majority of the shareholders who spoke today in Dallas, it would appear that their (IBM shareholders') fate is well deserved.  If anything, the crowd at the 1983 IBM meeting in Boston was tougher by comparison.  At least someone stumped IBM's Opel by asking him if he had a PC.

Happy bargain hunting!

Bob Djurdjevic

P.S. The quotes from the exchanges at the Annual Meeting are based on this writer's notes.  The actual transcript may vary slightly in form but not in substance. 

Gerstner on Tarzan

Gerstner took the words right out of our mouth.  Or so it seems...  We were certainly flattered when he used the same metaphor at today's IBM Annual Meeting that we did when reviewing IBM's first quarter results.  Right after having summed up that overall, IBM has made "solid progress," Gerstner added:

 "I hope you don't think we're on a 'Tarzan strategy' - swinging from one vine and grabbing another."

 We wrote (see Annex Bulletin 97-16, 4/23/97):

The "Tarzan" Strategy.  Not only were the revenues down for all IBM servers, but (Rick) Thoman was quite blunt when it came to the reasons the AS/400 business was down.  "It was due to inadequate promotion and channel management (especially in Europe)," he said.  During the Q&A period, he explained that, what he meant by that, was a poorly executed shift from the direct sales coverage to marketing through business partners.

We were reminded of an almost identical story we heard from DEC's CFO, Vince Mullarkey. He called it a failed "Tarzan strategy" (see Annex Bulletin 96-44, 9/06/96). 

What's a "Tarzan strategy?"

"Letting go of one rope before catching another one," Mullarkey explained. J

[1]  IBM apparently supplied to this Dallas school some of its educational products to help teach math more effectively.

Volume XIII, No. 97-18
April 29, 1997

Editor: Bob Djurdjevic
Published by Annex Research

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