In 1994, soon after Lou Gerstner arrived, IBM treasury went to work reconditioning the company’s global funding apparatus.
IBM this week revealed an awful quarter. Its latest earnings report showed a 4 percent drop in revenue, which is the 10th consecutive quarter of flat or declining sales. It’s been a tough few years indeed as the company did everything it could to meet the high-flying goal of delivering $20 per share in earnings (the latest quarter delivered $3.68). Instead it offered the performance of a hot-air balloon shedding ballast in order to stay afloat. As Bloomberg Businessweek so succinctly put it, “IBM (IBM) laid off workers, fiddled with its tax rate, took on debt, and bought back a staggering number of its own shares to make the math work, even as all that left the company less able to compete with the likes of Amazon.com and Google in cloud computing.”
This was certainly not IBM corporate treasury’s fault, which has had a great record of delivering value. Twenty years ago, in fact, it made a great move – one that perhaps laid the ground work for its next decades of success. Soon after new CEO Lou Gerstner was installed at IBM, he commenced to slashing billions in expenses and selling off assets. Meanwhile the company’s treasury went to work restructuring its overseas funding mechanism.
“IBM has negotiated with overseas banks to roll-in local credit lines under the umbrella of a centrally guaranteed facility,” International Treasurer wrote in the fall of 1994. This gave the company great flexibility when it came to taxes and funding. IBM began by shoring up its commercial paper program.
“IBM started clown the path to insure its CP program in April 1993 with a one-year, $4.6 billion cred it line put together by Credit Suisse,” International Treasurer wrote. “This was IBM’s first such committed facility in years. It was quickly followed by a larger, $10 billion committed facility involving 81 banks worldwide, arranged by Chemical Bank.”
It also made use of Ireland as a centralized funding location and to take advantage of its special tax offerings. “The company has an in-house bank at the International Financial Services Center (Dublin Docks) in Ireland. This European center taps surplus cash positions at regional affiliates and on-lends the funds to affiliates with deficit positions—all at market rates.”
Unfortunately, today that same financial wizardry is being frowned upon by many, including Mark Cuban. “They have no vision,” Cuban said recently on CNBC. “What they’ve evolved into is a company that does [arbitrage] on acquisitions. It’s stock buybacks. Who is IBM anymore? They specialize in financial engineering. To me, that’s not a future.”
What would Lou do?