Super-investor Warren Buffett's Berkshire Hathaway biz has revealed that he has spent most of this year buying up a 5.5 per cent share in IBM. The "Oracle of Omaha" said Berkshire had bought $10.7bn of IBM's stock to take a stake that makes it, along with State Street Global Advisors, one of the largest investors in the company …
He will not be demanding that the company be broken up in order to create more value for the shareholders.
As far a buffet's philosophy goes... Buffet doesn't demand either way. He just invests and sits - (almost) never interferes with execution. (There have been odd exceptions over the years but otherwise he is a more copybook kindov "investor").
On the question of should Big Blue breakup into tiny blue balls ? How - one would ask ? It's an IT services giant which at times peddles its own hardware/software. It already amputated the sore PC division. Its software and hardware pieces are simply captive manufacturing, sitting pretty behind the services umbrella. Those pieces are high margin internally... but simply wouldn't survive outside the umbrella and no one would buy those divisions, even if IBM wanted to sell them. So those fears of 90s when IBM was still peddling boxes of various sizes is no longer relevant. The new scare should be - will IBM cut its cost so much that it stops being effective ? That's the biggest risk IBM runs, if it continues to outsource to low cost geographies like it did in last 5 years. Investors demand profit margins and services business offers only so much in terms of increase in efficiency... but as history has witnessed that continuous cost cutting never works out in the long run.
There is an old saying...
There's a sucker born every minute.
And yeah, I'm saying Buffet was a bit of a sucker on this investment.
For those who don't know Buffet, he's a smart investor who once made a comment that he avoided high tech companies because he only invested in things he understood.
Well looks like he went out of his area of expertise...
He presumably understands that IBM is managed as a business, and not as an engineering shop like many other IT companies. He understands what Gerstner and Palmisano have done, which is all about executing a business model. As Palmisano once said, you don't need an engineering degree to understand the business model.
Not a company run by engineers
Yes, IBM is certainly not a company run by the engineers... it is and has for a long time, been a company run by lawyers and accountants. The bean-counters ensure that everything is done with ruthless efficiency (project "Lean" I think it is called internally?), and any weak areas of the business are hidden by clever accounting tricks (the microelectronics division for instance). The lawyers ensure those customers are tied up in nice tight contracts that look reasonable when signed, but soon turn out to be huge money spinners for IBM (£50 for a password reset anyone?)
It's a succesful business model to be sure. Is it sustainable, and is it a "good" thing for IBM customers? Dunno...
I see. You know so much about IBM...
Like you know your serial number?
Yes, I remember mine. I will admit to escaping from the blue pig.
Trust me when I say Buffet got screwed on this... Of course IBM is buying back shares... But I wonder how much money they have in off shore accounts. Care to bet there will be another amnesty coming up... Real soon?
Share buy back implies that company has money and doesn't know what to do with it, so it is reinvesting in itself. IMO, it shows lack of creativity. And, non-intuitively a lack of self belief as well (otherwise money could be invested internally to expand future revenue/margins).
- Share buyback is something that should be done ONLY when company has some decent long term tricks up its sleeve + equity market has bottomed out + market conditions are too volatile to invest in R&D. I remember HP did a share buyback just before the housing meltdown - whadda bummer that was!!
- IBM probably believes that market has bottom'd out - but I don't think they have any significant long term strategy up their sleeve that market can't see. So its just an "okay" decision, if not a "bad" one.
- IMO, instead of sharebuyback, that kindov money is better spent in oiling your wheels. Eg:
(1a) buy out a vendor who is overcharging you. Or give cash advance to its rivals so they can stand up on their feet. (1b) Give deep discounts to customers who have a future but a short on cash to to market situation.
(2) train your employees where customer satisfaction is low (especially if you are a services industry).
(3) invest in infrastructure that brings down your long term cost.
(4) IBM could've put some money in the fund starved research labs. Rival HP has memristor up their sleeve... what does IBM have ?
(5) buy shares for ESOPs - if the market is low.
(6) Invest in Universities which produce your kindov manpower.
(7) Invest in employee care.. (better maternity, health policies etc. If you are man power driven, you don't want your core to be dissatisfied).
I guess these multi-billion dollar companies get my point and in future they will consult me before doing such a dump move. ;-)
Another reason companies buy back shares is that part of their compensation plans include the offer of discounted shares to employees for purchase. In order to sell shares at a discount, the firm has to have shares to sell. Which means they have to issue new ones (not necessarily a convenient thing to be doing regularly) or buy them on the open market.
He needs to do nowt to increase his stake
Given that IBM has declared that they will be spending a lot of $$$ buying their shares back to increase shareholder value.
Less shares on the open market means that his 5.5% stake is getting bigger.
Buffett isn't perfect
For one thing, he bought big into an overvalued Conoco right before the credit crunch. Still, he hits more often than he misses, obviously, so this is a pretty good sign for IBM. OTOH, wish I had some IBM stock to sell, because now a lot of people will follow-the-leader.
Pump and Dump
Build up a large position. Tell everybody you're doing this. Mugs pile in. Price goes up. Sell the shares for a profit in a rising market.
You are an idiot. Buffet isn't a guy who does anything with the short term in mind.
It merely needs to increase in value.
Pump and Dump?
Berkshire Hathaway's average net stock turn is 5% per annum i.e. an average 20 year holding period. I doubt this is a pump and dump.
Another perspective/option/derivative/hedge position
mikelivingstone [said]…… on http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/electronics/8889215/Warren-Buffett-breaks-the-habit-of-a-lifetime-and-bets-big-on-IBM.html
"I smell a rat. Buffet has already bought the shares, and the IBM share price is riding high having made savage cuts to minimise costs ahead of Mr Palmisano's departure - he desperately wanted to get $200 a share. Word from IBMers I know is that cuts have gone too far and the company is now incapable of delivering new profitable revenue growth. The Earning per share illusion is purely one of buy backs and driving cost out faster than business is being lost due to the cuts. This isn't sustainable in the long term, and the Buffet story feels like one last attempt to get retail investors in to plump up the price to $200.
My betting is the IBM share price will tank in the next financial year and will be a good one to short."
I am inclined to wholeheartedly agree with you, mikelivingstone. IBM as it presently is, has no future growth potential and only a stagnant and moribund market position in a sector which has taken off and explores the unbounded opportunities which virtual systems deliver in Cloud and CyberSpace Applications Programs, which require nothing from or on license to Big Blue.
Warren is trying that tired old dollar/fiat currency methodology of getting some old buffer to throw money at something to try and fool ignorant folk into thinking it is valuable and worth more than it is and greater than practically nothing whenever technology and methodologies move on into more exciting and productive and creative and lucrative fields.
Hell, Warren is a old railroad man, and here we are now nowadays probing Mars with incredibly sophisticated computerised machines. What do you think that tells you about everything. He's a crutch for IBM and it is probably government money he's wasting anyway rather than any of his own. As was said and is known by all, Warren doesn't do technology he doesn't understand, and he's far too old a dog to have been taught any new tricks, that's for sure.
The whole thing is a markets trick ...... and aint that just typical of the games they play to keep the Great Wall Street Ponzi alive and pumping its Zombie Virus and American Dream Stream Meme.
Hey Dudes, Time for a New Illuminating Script without Judas and Doubting Thomas queering your Pitch and Patches.