IBM Plays a Shell Game

IBM (NYSE:IBM) has raised the share repurchase technique to a high level art form. By the way kudos on the tax aspect. If the IRS was not this foolish would IBM have done this? Now back to our main story.

IBM is using three large investment banks to create the illusion of repurchasing approximately 8% of their shares. The transaction is valued at $12.5 billion of shareholder money. 118.8 million shares have been taken off the table.

The result will be an illusion of accelerated earnings per share. What the magic trick does not do is accelerate enterprise earnings by any metric.

The new wrinkle is actually buying shares from those that do not own them, with the very important added nuance of massive scale. Because of this nuance the investment banks can send a bill to IBM if they start to lose money. There probably will be an adjustment at some point in the future. Watch for paragraph three comments at some point in the future when IBM needs to skate back on side with its publicly disclosed costs.

The disturbing aspect is this. Are the shares truly off the market? How long will it take to actually cover what I think is a modified short position? Will IBM be paying dividends on shares that do or do not exist?

Watch for an SEC investigation. I know IBM and associated parties probably have good advice or at least advice that was more expensive than good. The transaction begs the question that is fundamental in the stock market. How many shares are there. Boiler room operators used to issued tons of shares. This may skirt the issue much too closely.