Cash Management

IBM’s Unusual Buyback Has Overseas Twist

An accelerated repurchase arrangement allows Big Blue to report a higher EPS more quickly. What's more, buyback funds from foreign subsidiaries sho...
Stephen TaubMay 30, 2007

IBM said it repurchased $12.5 billion of its common stock using a somewhat unusual accelerated share repurchase agreement. Under the arrangement, IBM bought back 118.8 million shares, or 8 percent of its outstanding shares, for an initial price of $105.18 per share.

The shares were purchased from three banks under accelerated share repurchase agreements, which provided IBM with immediate delivery of the shares. Under those arrangements, the banks are expected to purchase an equivalent number of shares in the open market during the next nine months, IBM explained.

Further, by using the accelerated agreements, IBM is able to report higher per-share earnings more rapidly than it would using a conventional buyback approach, explained The Wall Street Journal. However, if the stock subsequently rises, the company pays out more.

The repurchases were executed through IBM International Group, a wholly-owned subsidiary based in the Netherlands, with $1 billion in cash and $11.5 billion borrowed through a loan agreement with several financial institutions. The principal and interest on the loan will be paid with cash generated by IBM International Group’s non-U.S. operating subsidiaries. Company officials stressed that the repurchases are part of the $15 billion authorization for the company’s stock repurchase program approved by IBM’s board of directors on April 24.

IBM treasurer Jesse Green told the Journal that “a few” other companies have used an offshore vehicle to complete similar repurchases. By doing so, IBM will be able to lower its tax obligations by using funds from foreign units without having to repatriate them to the United States. Repatriation often results in a tax bill from the United States if the money sent back is profit that was taxed abroad at a lower rate. “There’s an opportunity to use some of that cash overseas without being taxed again in the U.S.,” Green told the Journal.

After executing the $12.5 billion repurchases, the company has approximately $1.8 billion remaining from this authorization. The company said, however, that it does not anticipate requesting board approval for additional funds for stock repurchases prior to April 2008.

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