Earlie from Earlie:
Last evening, one of our fine posters listed IBM's debts. It was a good piece of "info hounding".
But there is another form of debt that exists within IBM (and within other similar operations that is every bit as worrisome. It is their equipment leasing situation. Here is a "quick and dirty" on it.
IBM builds mainframe computers. To do this, the company has to put up a certain amount of capital to pay for the research and design elements, the components that go into the box, the labour to assemble it, the sales force to sell it, etc. If it is sold, the company regains that capital, and hopefully some additional profit.
But much of IBM's mainframes are not sold per se,..... they are leased. This is no problem if the lease is created (or acquired) by some other firm, but in the case of IBM, the lease is organized by IBM's financial arm.
Once the mainframe is delivered, IBM books the sale, but of course the amount of money that has actually been paid into IBM for that mainframe is small indeed to start with and only grows to equal the booked sale over time. So long as the lease is paid in full, AND the used mainframe is also SOLD for roughly the "residual value" once it comes in off lease, then IBM is OK.
Now let's fast forward to the current environment where both business and individuals are experiencing much financial stress. Can we guess as to how many of those mainframe lease holders are calling IBM's financial arm to tell them to come and get the big box "cause the payments can't be made"? It is a very significant number.
Now what do the boyz at IBM do about this situation? Well to start with the LAST thing in the world that they want to occur is for that mainframe to come back into their warehouse. Why not? Because its actual re-sale value is roughly $0.05 to $0.10 on the dollar, which means that a "hit" has to be booked. So the boyz try to "work out a deal" with the client,......
- "We will up the interest a bit and tack it on to the back end of the lease,.... pay us as soon as you can." Or
- "We will take possession of some stock or warrants in your company", etc.
Anything to keep that mainframe out there is considered fair game and as long as it doesn't come back, no hit has to take place, no re-statement of former earnings, etc. Of course, sooner or later the expanding mess will need to be dealt with,... normally via a single "non-recurring write-down", which neither the analysts nor the investing public will understand or worry about.
So now to IBM's REAL debt load. But first a few questions:
- Might we surmise that much of the capital that IBM uses to assemble its mainframes is borrowed?
- As the economy weakens, might even more of these "bricks" that are out there become similar "non-performing loans"?
- What would a "proper accounting" say about IBM's actual balance sheet? What would it say about this burgeoning mess? Where would it place the BIG number that must sooner or later become a part of IBM's financials?
Not that it really matters, so long as investors are aware of the fact that a consequential part of IBM's past sales would be better viewed as "questionable" and worse, that a part of IBM's past sales are actually festering "bad loans" that must sooner or later be written down or even off.
If one factors this stuff into the IBM equation, the debt that shows up on their balance sheet becomes just one of the debt-related items that investors need to be wary of. And of course there are many other items of a similar nature hiding in Louis' well-cooked broth.
Best, Earlie |
