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INDUSTRY TRENDSWall Street's Message to Corporate America Buy Back Stock or Else! Dell Wins Again the 1999 Fluff Championship of the IT World
PHOENIX, Dec. 6 - Ever since early 1995 (which coincidentally marks the first big Wall Street bailout by the world's taxpayers - in Mexico, see Annex Bulletin 95-08, 2/02/95), the Wall Street bankers seem to have been holding a gun of sorts to the heads of Corporate America, demanding that they buy back more of their shares. "Or else," meaning they won't recommend the stock. So the non-conforming companies' shares may lag behind no matter how much money they made.
As with most backroom-boardroom happenings, of course, you never see the gun. Nor the elegantly dressed extortionist holding it. You only see the smoke. And fluff. Plenty of it.
Last year, Annex Research staged our first "Fluff Championship of the IT World" (see Annex Bulletin 98-39, 10/31/98). That's when we pointed out that, "during the last three years alone (1995-1998), corporate America had spent nearly half a trillion dollars on Wall Street's virtual 'cabbage patch' dolls - without creating a single new job or a product. Stock buybacks attracted more money in 1990-1997 than did the economies of all developing countries in the world - combined! (about $550 billion, according to a United Nations report - see Annex Bulletin 97-38, 10/16/97).
Well, Wall Street's stock buyback extortion or scam, take your pick, has continued in 1999. In fact, it has even accelerated, attracting some new buyers of the expensive "cabbage patch dolls" fad (EDS, for example). But the 1999 world champion of fluff is still the same - Dell, although by a smaller margin than in 1998.
Dell's "fluff ratio" (market cap over equity) shrank from 51.8 to 26.7, as its excellent fundamental business results boosted the shareholders equity by 169% since last year. Nevertheless, even with its $4.3 billion equity, Dell's market capitalization still contains 96% of "fluff," making it the "fluffiest" of all top 10 IT companies which we analyzed.
A close second, however, was Sun Microsystems, having leapfrogged over Microsoft, CA and IBM this year. With a "fluff ratio" of 23.1 and the equity of $5.1 billion, Sun's "fluff" content is only a fraction of a decimal point lower than that of Dell's.
But while earning only the silver medal in our fluff championship of the IT world, Sun nevertheless chalked up the fastest annual jump in market capitalization - 442%. Its legal troubles notwithstanding, Microsoft came second in this category with 90%, while HP placing third with a 72% annual increase.
Microsoft placed third overall, however, in our fluff championship of the IT world, with a 15.7 "fluff" ratio, followed by CA which had a 14.1 ratio.
IBM was fifth, having slid down one spot on the ladder from the fourth position it held last year. Ironically, this happened despite the fact that the Big Blue has spent by far more money on stock buybacks than any other of the top 10 IT competitors ($30 billion since 1994 vs. $11.3 billion in Microsoft's case, the second biggest buyer of its own stock).
IBM also holds the ignominious position of being the only company among the top 10 to have had its equity DECLINE (-14%) since 1994. EDS, on the other hand, was the only company among the top 10 to have had its equity decline since last year (-12%).
In the former case, the biggest single reason for IBM's loss of equity is its enormous spending on stock buybacks. In EDS's case, the main reason are the cost cutbacks and the associated charges which the new EDS management has implemented this year.
If the Corporate America's captains were really worth their salt, they would have told the Wall Street shysters to stuff it. But alas, that's a daunting challenge once you've sold out your business to the leeches. Institutional shareholders own on average 59% of the top 10 IT companies which we analyzed.
Yet that alone did not stop some CEOs from saying no to the leeches. Unisys and CSC, for example, are 73% and 74% respectively owned by the institutions, yet have not engaged in the stock buybacks. Of course, for that, they've been promptly punished by Wall Street which gave them "fluff" ratios of only 5.5 and 4.7 respectively.Happy bargain hunting!
Editor: Bob Djurdjevic
5110 North 40th Street, Phoenix, Arizona
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