Posted on Jun 11, 2019
IBM Paid $0 In Taxes Thanks To Trump Tax Cuts. Now It’s Laying Off 1,700 Employees.
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Most of the tax windfall went to stock buybacks instead of increasing production or increasing wages.
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SPC Erich Guenther
IBM routinely does stock buybacks. While some look at them with horse blinders on and say they do not add value, in IBM's case they are used to obtain lower borrowing rates on debt by maintaining a min target price on the stock, shares of stock are also sometimes exchanged for acquisition. In the case of the Red Hat Linux acquisition IBM is doing larger stock buybacks to prevent decline in the value of it's stock to do the dilution effect caused by the merged company, Red Hat plus IBM common stock. So in IBM's case and I would argue this is the case for most Corporations. Stock buybacks are part of their finance of both ongoing operations as well as Corporate Acquisition costs. The argument against them is they do not have the immediate stimulus effect as say a direct redistribution of wealth would. Say the government raising taxes and immediately spending the money on shovel ready projects. That maybe true but over the longer term, stock buybacks can improve the overall health of the company by reducing interest expenses due to debt, reducing the need to rely on issuance of debt if stock can be issued at a higher price in the future, etc. In my view there is a stimulus effect of stock buy backs long-term, just it is not apparent short-term. On the flip side of the coin, stock buybacks can also be used by management to hide crappy business management in which the stock buyback maintains the price of a stock which otherwise should decline due to bad management decisions. This would be abuse of stock buybacks and I for one would like to see a study on what companies use stock buybacks as part of their internal financing vs what companies abuse them. We don't have that now, we just have folks on Wall Street opinining on stock buybacks without providing any real stats on them or their effectiveness.
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MAJ Ken Landgren
Thanks for your feedback. Many IBM board members and investors complain about the stock buybacks, the stock is still a dog.SPC Erich Guenther
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SPC Erich Guenther
MAJ Ken Landgren - It is right now, they overpaid for Red Hat Linux. I used to work distantly with Ginney Romnety when I was in IBM Consulting.........she is CEO of IBM now but still kind of an over-optimistic ditz.
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SPC Erich Guenther
It's interesting because we don't hear anything about GM's Electric Car plans anymore yet Ford is already committed publicly to over $2 billion in spending. GM got government money and a bailout to boot because it was far ahead with the electric car. Seems like Tesla and Ford have both surpassed GM. Wall Street wants Ford to buy Tesla but I think that is too much debt for Ford and hope they don't.
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SPC Erich Guenther
Ford is spending $1 Billion just to bring back Detroits Michigan Central Station from a derelict building to fully restored train station and office building......which is really cool. That is going to be their new electric car division HQ.
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Which I think is good this year anyway as they are in or headed for financial trouble and need to prove their new technical direction. Had IBM paid full taxes this year would it be better off or worse off, in my view it would have been worse off and there would have been deeper job cuts to preserve capital for the future.
The whole point of the tax credit was so Coporations would have more money to spend in this country as compared to overseas which at some point will influence their investment decisions. Nobody stated that every Corporation would decide to expand right away within a year or two of the measure passing. Rather the effect would be over time. Likewise, letting them keep more of their tax money would cushion downturns more and reduce the need to layoff employees or cut as deep. In that respect I think they are working. We have to wait and see over at least a 10 year period if this makes U.S. Companies more competitive. It's also just an experiment, the measure will terminate in 10 years unless Congress renews it. So I am not sure what all the bitching is about. Congress should experiment like this. The goal of Congress should be to increase the wealth of both the taxpayer and the country vs. taxing us all nonstop into financial ruin.
The whole point of the tax credit was so Coporations would have more money to spend in this country as compared to overseas which at some point will influence their investment decisions. Nobody stated that every Corporation would decide to expand right away within a year or two of the measure passing. Rather the effect would be over time. Likewise, letting them keep more of their tax money would cushion downturns more and reduce the need to layoff employees or cut as deep. In that respect I think they are working. We have to wait and see over at least a 10 year period if this makes U.S. Companies more competitive. It's also just an experiment, the measure will terminate in 10 years unless Congress renews it. So I am not sure what all the bitching is about. Congress should experiment like this. The goal of Congress should be to increase the wealth of both the taxpayer and the country vs. taxing us all nonstop into financial ruin.
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