Over the past 25 years, IBM has been divesting from a number of its core businesses. IBM’s core businesses have over a similar period been faced with numerous challenges. As a result, sales and revenue have been declining over the years. However, the paradox of all this is that despite the declining sales and revenue, IBM’s stock value has been rising, a welcome situation for its shareholders (Henschen).
The increase in share value despite a shrinking IBM illustrates a shift in the evaluation of companies over the years. Focus has shifted from a company’s value based on its real market (actual production) to the expectations market (stock market). Consequently, a company’s value is deduced more from its stock value as opposed to the level of actual production and capital outlay (Yang).
One of the main reasons for the consistent increase in IBM’s stock value despite declining sales and revenue has been the management’s decision to buy back its own shares consistently. As of 2016, the company’s outstanding shares had been reduced by 37% courtesy of the share buybacks (Morning Star). A lower number of outstanding shares in the stock market imply that Earnings per Share (EPS) are expected to go up by a relative margin. A high EPS serves as an incentive for investors and as a result, raises the level of demand for its shares hence raising value for its shareholders.
The company’s management as a means of reallocating capital has viewed the share buybacks. This is because, despite the companies declining revenues and sales, it still has a vast amount of free cash flows hence making it a plausible decision to buy back its own shares. The value of its shares has also been supported by the above industry average dividend payouts by the company.
The international business machines company has made its decision to purchase back about 45 million shares that outstand of its series A favourite stock for about USD25 per share, that amounts to more than USD 1.1 billion. This preferred stock which was issued in May 1993 is the most preferred stock the company has ever offered.
After losing about $ 8.1 billion in 1993, the Company has come back to profitability. It makes better sense for the company to purchase back those shares than it spends on paying preferred dividends. The company’s management thinks it is the prudent and efficient application of their funds. In return, the corporation had attained over USD 10 billion. The cash would be used to minimize the debt and purchase other firms.
The company sets to release a tender offer. Under the terms of the tender, the shares that are tendered and bought by the company will not get the normal quarterly dividend that is anticipated to be paid for the initial quarter (Amos 37). On the New York Stock Exchanges, the preferred shares have risen by USD 1.625 to USD 25 while the company’s normal shares have risen by USD 1.125 to USD 76.625. The firm’s decision to repurchase preferred shares shows that its financial outlook is better than when these shares were offered.
Since dividends on the preferred stock are compensated before dividends for the common shares, elimination of the preferred stock increases the common stock per share benefits.
Finally, although the company’s preferred stock is equal, it tends to be a long-term fixed rate obligation that is similar to debt. On this matter, IBM has reduced its debt by over USD 4 billion in the last few years.
Work cited
Amos, Orley J. Microeconomics: Concepts and Applications. Belmont, Calif: Wadsworth Pub. Co, 1987. Print.
Henschen, Doug. IBM Can't Shrink Its Way To Greatness. Information week. 2015. Online Morning Star. International Business Machines Corp. Morningstar.com. 2016. Online
Yang, Jia. L. Maximizing shareholder value: The goal that changed corporate America. The
Washington Post. 2013. Online
