Friday, January 06, 2006

IBM--A Woolly Mammoth in Disguise?

International Business Machine (IBM - $84.95) officials said Thursday that in 2008 the company will freeze pension plans for American employees and offer only 401k retirement plans thereafter.

For the nine-months ended September 30, 2005, IBM incurred retirement plan expenses of approximately $454 million.

The Company's restructuring actions were designed to yield a more competitive employee-cost structure, and allow the company to more efficiently manage escalating labor costs, including retirement-related costs. IBM estimates the changes will result in savings of $450 million to $500 million for 2006, and savings of $2.5 billion to $3 billion for the period 2006 through 2010. As of September 30, 2005, it is duly noted that retirement and nonpension post-retirement benefit obligations stood at approximately 50% of shareholder equity.

Not to stand on a soapbox,,,BUT the 10Q Detective sees this as an unimaginative move by a technological woolly mammoth to re-define its 'quality of earnings.'

If IBM management is truly looking to cut costs, instead of erasing future workers' retirement benefits, perhaps IBM officials should stop spending on wasted capital projects--like $4 billion recently targeted for IBM stock repurchase plans. It has been debated before on the pages of The Wall Street Journal and BusinessWeek, etc., but we're in the camp that believes $4 billion might be better spent on R&D, where it actually might lead to product and job creation.

If IBM stock were such a good investment for corporate dollars, why is it that in the last six months, net insider selling totaled 466,569 shares. Not to single any one senior VP out, but how is this for a vote of confidence? On November 7, 2005, Form 144 filings show that Steven A. Mills made a cool $3.9 million profit by simultaneously exercising/selling granted stock options.

Looking at its recent 12-month price history,IBM stock is trading down 11.3 percent.

About 11,000 years ago, something happened and big mammals--like the sabre-tooth cat, the woolly rhino, and the woolly mammoth--went extinct. Cool climates that grew warmer; hunted to extinction by humans; or no immunity against new pathogens--all are viable theories that explain the demise of these mighty animals. The common thread running through all these arguments--a failure to adapt.

The Company's restructuring actions are stop-gap measures. Management must execute on delivering on its previously stated business model founded on innovation. Simultaneously, unless IBM can adapt to shorter technological product cycles, we doubt that the Company will deliver on promised double-digit earnings per share growth.

Readers might want to avoid the shares of this woolly mammoth.


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