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First of all, Cringely is right on the first part. IBM, and many other companies, are taking advantage of the low rate environment to borrow money and buy back

First of all, Cringely is right on the first part. IBM, and many other companies, are taking advantage of the low rate environment to borrow money and buy back stock. This is capital structure optimization, and many companies do it. He is tongue is cheek about the problems being the Fed's fault. There are impacts to this policy. By borrowing to buy back equity, you are increasing the chance of distress. You don't increase your cash position, but you do increase the amount of interest payments you have to it. (Albeit less due to the low rate environment) This means it is more difficult to bet on anything that isn't a sure thing. That said, perhaps this is the best way for shareholders to wind down a company that can no longer innovate. At some point, large companies can cease to be innovative, and cease to profitably handle acquisitions. Then what? Especially if you're too big to be bought out yourself. There are two options... One - Split yourself up and sell the parts to the highest bidders. Two - Buy back the shares. Shrinking the outstanding shareholder base will increase the per-share value even if the total corporate value is flat. Rather than waste money on innovation (if you can't) or M&A (if you overpay and underintegrate) better to give it back to the shareholders and let them invest capital in companies that can grow. Borrowing to buy back shares is just taking case #2 to the extreme, and ultimately passing the buck to the long term bond holders.

walshemj 12y ago
Or you know just have a special dividend share buybacks (outwith IT's controlling discount) always struck me as a way to line the pockets of the advisors and not the actual shareholders.
- mathattack 12y ago
  Generally share buybacks help the shareholders quite a bit. Unless I'm wrong, the advisors don't skim as much off of buybacks as they do IPOs. (And I am wrong more than I care to admit!)
  - walshemj 12y ago
    But a dividend is a quantifiable amount than just the company buying shares and hope the market follows rationally.
    - mathattack 12y ago
      The problem with the dividend is that it's immediately taxed. That said, if you take taxes aside, it's actually the same either way. This is the crux of the Modigliani Miller theory. [0] An oversimplified way to look at it... Let's say a company has 1 million share worth $100, $50 of which is sitting in cash, and wants to return half the value to the shareholders. One way to do this is via a dividend. Each share is now worth $50, and each shareholder has $50 in cash. (No net gain or loss, but the shareholders can do what they want with the money - the capital is freed) Alternatively, they can buy back 500,000 shares. Each of the remaining shares is worth the same amount, but $500K of new shares is released to new uses. Same net value as above. No new value is created or left behind, it's just the dividend gives a partial payment on each share, while the buyback gives a full payment on some of the shares. What IBM does is borrow money rather than pay cash, because they can deduct the interest payments on the debt. (This violates one of the assumptions on the MM theorem) [0] http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theor...
scholia 12y ago
See The Fed's Financial Repression At Work: How Big Blue Was Turned Into A Wall Street Slush Fund, by David Stockman at Seeking Alpha http://seekingalpha.com/article/2324305-the-feds-financial-repression-at-work-how-big-blue-was-turned-into-a-wall-street-slush-fund http://seekingalpha.com/article/2324305-the-feds-financial-r... It's a good piece, even if you don't share Stockman's view of the US economy and its impending doom http://seekingalpha.com/article/2324315-the-implosion-is-near-signs-of-the-bubbles-last-days http://seekingalpha.com/article/2324315-the-implosion-is-nea...
- jobu 12y ago
  That first article is really good (the second reads like the breathless ranting of a conspiracy theorist). If other major companies are doing the same thing as IBM (seems likely), then it's the best explanation I've seen for the stock market boom over the last couple years. There has to be a way to incentivise these companies to create real, long-term value over short-term stock price manipulation.
  - mathattack 12y ago
    After a while they just get too big to do it. But that's ok. As long as someone is willing to buy the bonds, there's nothing wrong with shuffling the capital structure. In theory, some people need fixed income instruments (say insurance companies) so there is a market for it. If the people with risk capital want to place it on smaller more innovative companies, why not?

walshemj 12y ago

Or you know just have a special dividend share buybacks (outwith IT's controlling discount) always struck me as a way to line the pockets of the advisors and not the actual shareholders.

mathattack 12y ago
Generally share buybacks help the shareholders quite a bit. Unless I'm wrong, the advisors don't skim as much off of buybacks as they do IPOs. (And I am wrong more than I care to admit!)
- walshemj 12y ago
  But a dividend is a quantifiable amount than just the company buying shares and hope the market follows rationally.
  - mathattack 12y ago
    The problem with the dividend is that it's immediately taxed. That said, if you take taxes aside, it's actually the same either way. This is the crux of the Modigliani Miller theory. [0] An oversimplified way to look at it... Let's say a company has 1 million share worth $100, $50 of which is sitting in cash, and wants to return half the value to the shareholders. One way to do this is via a dividend. Each share is now worth $50, and each shareholder has $50 in cash. (No net gain or loss, but the shareholders can do what they want with the money - the capital is freed) Alternatively, they can buy back 500,000 shares. Each of the remaining shares is worth the same amount, but $500K of new shares is released to new uses. Same net value as above. No new value is created or left behind, it's just the dividend gives a partial payment on each share, while the buyback gives a full payment on some of the shares. What IBM does is borrow money rather than pay cash, because they can deduct the interest payments on the debt. (This violates one of the assumptions on the MM theorem) [0] http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theor...

scholia 12y ago

See The Fed's Financial Repression At Work: How Big Blue Was Turned Into A Wall Street Slush Fund, by David Stockman at Seeking Alpha http://seekingalpha.com/article/2324305-the-feds-financial-repression-at-work-how-big-blue-was-turned-into-a-wall-street-slush-fund http://seekingalpha.com/article/2324305-the-feds-financial-r... It's a good piece, even if you don't share Stockman's view of the US economy and its impending doom http://seekingalpha.com/article/2324315-the-implosion-is-near-signs-of-the-bubbles-last-days http://seekingalpha.com/article/2324315-the-implosion-is-nea...

jobu 12y ago
That first article is really good (the second reads like the breathless ranting of a conspiracy theorist). If other major companies are doing the same thing as IBM (seems likely), then it's the best explanation I've seen for the stock market boom over the last couple years. There has to be a way to incentivise these companies to create real, long-term value over short-term stock price manipulation.
- mathattack 12y ago
  After a while they just get too big to do it. But that's ok. As long as someone is willing to buy the bonds, there's nothing wrong with shuffling the capital structure. In theory, some people need fixed income instruments (say insurance companies) so there is a market for it. If the people with risk capital want to place it on smaller more innovative companies, why not?