Chris, IBM does have free cash flow, as they are in several mature, declining businesses where new investment demands are not huge. Not enough to totally fund stock buybacks of this magnitude, hence the borrowings. However, the buybacks, done partially with cash generated by operations, only has to have an earnings return above the borrowing rate to be accretive. So, if you stop wasting so much money on stupid business stuff like R&D, ratchet down the tax rate, and really sharpen the pencil on expenses, you get a nice inflow of "eps" to add to the service revenues you are imagining. If this eps "growth" number is above the net interest rate paid for the debt, then any shares you buy back adds to eps.
So, the buyback is only part of the larger picture of creating eps growth. You have to price services below what better and more experienced cos. would consider breakeven, and then assume profits on long term contracts, a disproportionate amount of which accrue immediately. That helps give you reported eps growth above the interest rate on debt. So, you borrow to buy back shares and it makes it look even better. |
