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Bloomberg News Wire

October 27, 1998

IBM Board Authorizes $3.5 Billion Share Buyback

By Molly Williams

FOR PERSONAL USE ONLY.

Armonk, New York, Oct. 27 (Bloomberg) -- International Business Machines Corp. said it plans to buy back as much as $3.5 billion of its stock, a bid by the world's largest computer maker to boost the value of its shares.

The proposed buyback, which represents 2.7 percent of shares outstanding, comes just days after IBM reported surprisingly strong third-quarter results. Earnings rose 10 percent to $1.49 billion, or $1.56 a share, from $1.35 billion, or $1.35, a year earlier.

IBM buys back shares in part because it generates so much cash from operations and has little need to build new plants. Most of its sales growth now comes from computer services, and that takes less investment than building the machines themselves. IBM has spent $23 billion buying its own stock since 1995. ``Their fastest-growing business is services, and you don't have to build factories for that,'' said Bill Milton, an analyst at Brown Brothers Harriman & Co. in New York, who has a ``short- term buy'' on IBM shares. ``You have to d something with the money.''

Buyback Boost

IBM's shares jumped to a record 146 13/16 after the company disclosed the buyback. They rose 2 1/4 to 145 5/16 in midafternoon trading. Buybacks increase earnings per share by spreading net income among fewer shares. Chairman Lou Gerstner has used them often over the years to lift shareholder value.

The company said it had 922.9 million shares outstanding at the end of the third quarter. At yesterday's closing price of 143 1/16, IBM could buy back about 24.5 million shares. IBM shares have risen about 16 percent in the past three months.

IBM unveiled a $3.5 billion authorization in April, and it has exhausted all but about $1 billion of that. The company also announced $3.5 billion buyback plans in April 1997, October 1997 and November 1996, and a $2.5 billion plan in April 1996.

Some analysts have criticized the company for spending its cash to buy back shares instead of investing in acquisitions or new initiatives. IBM has said it will spend its $5.9 billion in cash on buybacks, acquisitions and capital investment.

'Waste of Capital'

``It's a waste of capital -- it doesn't create a single product or a single job,'' said analyst Bob Djurdjevic of Annex Research in Phoenix, who has been a longtime critic of buyback programs at IBM and other companies.

In the third quarter, Djurdjevic estimates that IBM's share buybacks increased its earnings per share by 11 cents. ``It creates an illusion of prosperity by boosting the financial results without adding a cent to the bottom line,'' Djurdjevic said.

Also, IBM could use the cash instead to boost its quarterly dividend, which fell from as much as $1.21 a share in 1992, before the stock was split, to as little as 12.5 cents in 1993 when Big Blue was in deep financial trouble.

IBM now pays a quarterly dividend of 22 cents a share, raised from 20 cents in May 1998. The stock split two for one in May 1997. IBM declared its dividend of 22 cents today, payable Dec. 10 to shareholders of record Nov. 10. IBM also said it named American Express Co. President and Chief Operating Officer Kenneth Chenault to its board.

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