IBM hollowed out by ‘financial engineering’
Technology company's spending on financial engineering has left it a shadow of its former self
IBM's woes are interesting not simply because they tell us about the economy, but because they reveal broader truths about how, and for whom, firms are run.
IBM kicked its 2015 operating earnings goal off the back of the truck, blaming an outright fall in third-quarter revenues on a sudden downturn in client spending.
"We saw a marked slowdown in September in client buying behaviour, and our results also point to the unprecedented pace of change in our industry," said Ginni Rometty, IBM chairman, president and chief executive. IBM shares fell more than 7 per cent in reaction, giving up more than three years of gains.
It is a firm which did this after five to 10 years of following one of the most popular corporate strategies out there: prioritising financial engineering over investment, and giving primacy to living quarter by quarter rather than for the longer term. The result, and IBM is far from being alone here, is a firm left with a hollowed-out core franchise which has been deprived of investment, combined with higher debt loads.
From 2000 to 2013, IBM pursued an epic campaign of buying back shares, flattering earnings but perhaps at the expense of investment in the future, something which, as a technology company, is promised to no one. During that period IBM spent more than US$108 billion on share buybacks and an additional US$30 billion on dividends. That compares to just US$59 billion on capital expenditure.
Indeed, in the last six years, the firm's debt load has about tripled but sales are essentially flat.