IBM’s Market Cap Totals at $105B after Spending $140B In Stock Buybacks

Share buybacks have been prevalent throughout these past two decades, with corporations across the globe buying their own stocks in record amounts. However, this isn’t a successful strategy all the time, as is shown in IBM’s case.

Short Term Versus Long Term

Corporate share buybacks have had its fair amount of controversy and criticisms these past few months, as many corporations opt for short-term gains over long-term planning. Airline companies, in particular, as well as other corporate giants, have now been forced to ask for bailouts as a result of their own shortsighted strategies.

IBM stands as a prime example as to why stock buybacks can be a bad idea. The company managed not only to spend a large amount of capital doing it but didn’t even manage to boost the market capitalization of itself amid the buybacks.

Trying To Boost Market Cap

Compound Capital Advisors had its CEO, Charlie Bilello, explain the numbers. IBM demonstrates how the stock buybacks were based on short-term thinking instead of long-term.

The primary motivation for stock buybacks is simple: Have their shares perform better within the stock market as a whole. An easy way to do this is to purchase them off the market yourself, lessening the supply in the process. The hope is that through less supply, the higher demand will cause the price to go higher. The idea is that this, in turn, would increase the market capitalization of a company. It’s a basic concept but has long-term consequences.

Failure To Get Desired Results

In IBM’s case, this served only to fail spectacularly. For twenty years, IBM has been buying back its stock, and in those twenty years, it’s paid $140 billion to do so. The issue is, the total market capitalization for IBM at this time is just at $105 billion, which is a quarter less than what the company had spent to boost its market cap.

With companies left exposed due to the pandemic, stock buybacks have been placed under extreme scrutiny these past few months due to it becoming a significant issue. It’s gotten to such a point that back in March of this year, certain major banks started taking steps to prevent companies from buying back their stocks. As it stands now, it’s unclear whether or not the US government will enact certain measures.

Only Way Is The Hard Way

In the end, there is no real way to “quick fix” the current economic crisis. The world cannot return to normal as long as the virus isn’t contained. With the grim outlook being what it is, it’s very possible that the only companies that will exit unscathed are companies with long-term goals and savings ready for precisely this kind of situation.