This doesn’t pass the smell test: using a corporation’s credit to borrow money buy back the corporation’s shares or pay dividends to support the share price and not coincidentally “enhance” the value of employee stock options. As IBM is proving, such tactics can redound to the corporations long-term detriment. From Wolf Richter at wolfstreet.com:
Financial Engineering bites back.
When IBM announced earnings last week, it talked about all the great things it was accomplishing to compensate for the fact that revenues had plunged 14% from a year ago to $19.28 billion, and that even “revenues from continuing operations,” after accounting for operations it had shed, dropped 1%. It was the 14th quarterly revenue decline in a row. Three-and-a-half years!
It’s not the only American tech company with declining revenues. There are a whole slew of them, mired in the great American revenue recession, including Microsoft, whose revenues plunged 12%. So they – big tech – are in this together.
But turns out, IBM’s revenues, as bad as they have been, might have been subject a little more financial engineering than normally allowed.
Today, IBM disclosed that the Securities and Exchange Commission is investigating how it has accounted for these lousy revenues. The one-sentence disclosure was tucked away in a footnote on page 45 of its SEC Form 10-Q, which it filed today:
In August 2015, IBM learned that the SEC is conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., U.K. and Ireland. The company is cooperating with the SEC in this matter.
“A company spokesperson wasn’t immediately available to elaborate on the probe,” according to the Wall Street Journal.
As I’m writing this, IBM is down 4% to $138, a new 52-week low:
To continue reading: IBM Discloses SEC Investigation, Shares Plunge