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    Highlights for week ending November 9, 2002
  • TheStreet.com: Cash Flow Paves Way for a Fall at IBM. Excerpt: "IBM stock has soared almost 50% in a month, bolstered by a spreading belief that the tech behemoth has weathered the IT spending slump. But a hard look at the company's just-reported cash flow data suggests that IBM's business may not be as sturdy as Wall Street thinks, leaving the stock vulnerable to a steep drop. Among savvy investors, measures of cash flow -- the amount of actual greenbacks generated by ongoing operations -- have supplanted earnings as the favored method of analyzing IBM's financial performance. Both bulls and bears see cash flow as the cleanest way of gauging the fortunes of a large and complex company that has a relatively opaque income statement. Earnings numbers, by contrast, can be obscured by the presence of numerous noncash items." ... "IBM expects to make $1.5 billion of contributions to the company's pension plan to better balance its assets and liabilities. The company declined to say over what period that contribution will be made. If it's one year, that would take free cash flow down to $5.75 billion, or $3.35 per share. But if it did $500 million per year over the next three years, it would mean $3.94 per share of cash flows."


  • Reuters: IBM files for option to use shares to fund pension. Excerpt: "International Business Machines Corp. (NYSE:IBM - News) on Wednesday filed with U.S. regulators for the option to contribute up to 19.3 million of its shares to its pension plan, which could then resell the stock if it chooses."
    • Janet Krueger comments (full extract): "$1.5 billion is a very large number, and has a high shock value. But I think we need to put the number into perspective. IBM has about 130,000 employees in the US. They only contributed to the pension fund once in the last 12 years, and that was a very small amount. If they put in $1.5 billion dollars by 2005, that will mean they will be contributing approximately $750 per year per employee.. Doesn't seem like very much given that the plan is supposed to be accumulating at a rate of 5% of each employee's salary per year, does it?"


    • Mike Cericola comments (full extract). Excerpt: If, as you cited, IBM is selling $1.5 billion of IBM stock in order
      to replenish the pension trust, the action is neither altruistic, nor legally required. IBM could merely go on a payments program, over the next five years to do that. The reason is a bit more sinister. By their doing this, IBM's pension trust fund is temporarily in surplus, and that means that in IBM's 4th quarter, it can again report that there are pre-paid pensions generated by (hah!) operations, and that some of those "pre-payments" will be taken into the earnings statement. And, of course, executive bonuses will be increased by this move. Bottom line: this action will benefit the executives at the expense of the stockholders. And, just as in the options buy-back program, the true expense never hits the books. I was wondering when the folks at Armonk would again take advantage of this particular hole in the accounting system. They did it in the early 90's, with a stock set-aside for retirees' health costs, - and then cancelled it when it suited their purposes.

  • Poughkeepsie Journal: IBM to feed pension fund. Excerpt: "IBM Corp. has come up with a slightly different solution to bringing its pension fund up to par. It may take IBM stock it holds in its treasury and put it into the U.S. Personal Pension Plan." ... "The plan's report for 2001 showed a value of $39.6 billion and a surplus of nearly $1 billion. At the end of 1999, the combined U.S. and non-U.S. plans boasted a surplus of more than $17 billion. By the end of 2001 that had shrunk to $686 million."


  • Poughkeepsie Journal: IBM cited in additional age-bias complaints. Excerpt: "One chart, for a Global Services action that cut 253 employees, shows that among employees under age 40, pink slips went to 4.3 percent. But that rose to 5.9 percent for those over age 40. Over age 50, it rose to 8.1 percent. But when sorted by five-year age groups, the percentages vary from 3.7 percent for ages 40-44 to as high as 16 percent for 60-64. At IBM, spokeswoman Kendra Collins said, 'We wouldn't have any comment on their number work.' Rivera said IBM may argue that the actions are aimed at taking expenses out. 'But the expensive people happen to be your older people,' he said."


  • Poughkeepsie Journal: IBM, ex-worker back in court in retaliation suit. Excerpt: "IBM Corp. and a fired ex-employee are back in federal court over his allegation that the company illegally retaliated against him for complaining of age discrimination. Mark D. Cring, who worked at IBM's Tampa offices until fired in 1999, alleged in court papers that IBM also tolerated an executive there who brought guns to work and was abusive."


  • Business Week: Q&A: Lou Gerstner Takes the Gloves Off. Excerpt: "Q: Critics have questioned the quality of IBM's earnings, suggesting that IBM's turnaround is due to slick financial ploys. Why didn't you use the book to respond? A: Those discussions were not relevant to a book that deals with a 10-year history. We've responded in the last year with a lot more disclosure. We've always told people that we made money on intellectual property, and we always gave them the number. But they wanted to see it put in the income statement, so we moved it to the income statement and broke it out. We've always told people in the footnotes what the pension assumptions were, but they wanted it more frequently and more visibly. So we now give them more frequent and more visible discussion. For the most part, the issues for IBM were disclosure. They were never accounting. A couple of the issues that people have thrown into the bucket of financial engineering I find strange."
    • "ffandrick" comments. Full excerpt: "The quote about the stockholders making billions so he should make millions leaves out how he made those millions (vapor profit, selling off assets, screwing the retirees and the employees). I wish I could have supplied the interviewer with just one question. 'Lou, IBM was annually at the top of list of the most admired companies, but since you took over they have dropped totally out of the list (top 100 companies), why is that?' A true answer would be. 'I took a great company and made it into just another greedy, money hungry, profit at any cost company, that treats employees like assets, firing and hiring them without concern for the long term effect on the company. And forget the retirees, they contribute nothing to the bottom line, so I used their pension gain for profits, didn't give them fair COLA's, raised their medical costs and just hoped they go away. Respect for the individual' as a basic company principle is not cost efficient'."

  • Business Week: So Much for Cracking Down on the Accountants. Pitt is gone. But the saga of Webster's appointment is strong evidence that the audit industry and the Bush Administration are bent on evading reform. Excerpts: "Every investor ought to be appalled by the attempt of the accounting industry and the White House to reverse reform by stealth. What practical difference does it make if the board is headed by a William Webster or by a truly independent and expert figure such as former TIAA-CREF chief John H. Biggs? Webster, according to well-placed SEC sources, lacks the technical expertise that the job requires and was intended by his sponsors to be an ally of the accounting lobby. A Webster-style board would likely allow the accounting industry to revert to the weak self-regulation that failed to prevent the fraudulent audits, bankruptcies, and stock market calamity of recent months." ... "It's hardly surprising that business conservatives resist regulation of, say, health, labor, and the environment. You would think, though, that they would want to have honest corporate books. American capitalism works only to the extent that investors receive truthful information. The AICPA's behavior is scandalous, but the deeper scandal here is the myopia of political leaders who pose as champions of capitalism."


  • Business Week: Revenge of the Retirees. Excerpt: "When C. William Jones retired from Nynex in 1990, the company feted the debonair managing director with a toast-filled bash at '1095,' its tony midtown Manhattan headquarters. The VIPs gave Jones a plaque commemorating his 30 years of service, a Minolta camera, and a flurry of old-boy handshakes. Like hundreds of others before him, they then sent Jones on his way, expecting him to do as any company lifer does: go quietly into the good life, whittling away his handicap at the club and logging some luxury travel with the wife.

    Little did they know that Jones, 64, would be back--not as an executive has-been but as a leader in a rapidly growing movement: the revenge of the company man. Jones now heads the 90,000-member Association of BellTel Retirees. The group is one of many in a new, nationwide organizing effort made up of former white-collar managers and execs who are disgusted by corporate greed and outraged by pension and health-coverage takebacks. It would be one thing, they say, if the promised benefits were being slashed for the good of the company. Instead, they're watching CEOs bank hundred-million-dollar fortunes. (Editor's note: According to Annex Research, Lou Gerstner’s total compensation in the five years ending in 2001 was $366 million). 'It's not unions out there saying this to executives,' says Karen Friedman, director of policy strategies for the Pension Rights Center. 'These are people who used to be them.'"

    ...This year, a retiree class action brought against Sears, Roebuck & Co. pressured the company into offering partial relief after it cut life-insurance benefits. And IBM workers continue to fight Big Blue over its new cash-balance pension plan, which offers many workers a substantially smaller payout than what they would have gotten under the old system. So far, the group, made up of current and former employees, says its efforts helped persuade IBM to exempt employees age 40 and above from being forced into the new plan. But they are still fighting for younger workers. 'These people were promised a secure retirement,' says former IBM engineer James Leas, a retiree organizer, 'and now they're not getting it.' IBM declined to comment."


  • Wall Street Journal: IBM Says Its New Initiative Will Save $2.5 Billion in 2003. Excerpt: "International Business Machines Corp., which has been promoting its vision of 'e-business on demand' to customers, expects to use the technology to cut costs by $2.5 billion next year, said Douglas Elix, head of its global services business." ... "Mr. Elix said that 30% to 40% of the savings will come from reducing the number of people needed, although he said many will be assigned to other projects rather than laid off."


  • Reuters: Gregg eyes pension changes under Republican Senate. Excerpt: "Sen. Judd Gregg said on Friday that under the Republican-controlled U.S. Senate he may try to promote defined benefit pension plans which have lost ground with corporations in recent years."


  • Business Week: After Pitt, Who? The hunt is on for a new SEC commisioner And while lots of names are being offered, none so far seems to have all the right stuff. Extract: "One complication is that President Bush has yet to signal what he wants in the next SEC chief (see BW Online, 11/7/02, "Wanted at the SEC: A Reformer's Passion"). Does he want someone who'll make peace with two Democratic commissioners while pursuing more accounting and corporate-governance reforms? Or does he want his next SEC leader to begin mending fences with Wall Street and Corporate America? "

This week on the Alliance@IBM Site:

  • How to break the American Trance by Granny D. Excerpt: "The new business hero, a Horatio Alger on crack, did very well. The new model CEO derived from that moment -- the ruthless mercenary who would come in to reorganize a company and render it takeover-proof by rendering it inhumane. This executive was worth millions per year, we were told. In this way, a Darwinian system of corporate survival assured that the most carnivorous, rather than the most responsible, would rise to lead our most powerful commercial organizations. And if you need an explanation for Fox News or Enron, this is the history you need to remember. These super wealthy predators now, through their political patronage, control both political parties. They control Congress and the White House. They control elements within your state house."


  • New IBM CEO continues Lou Gerstner's policies of greed, by John R. Kotson, IBM Retiree and former IBM Manager. Excerpt; "The Wall Street Journal reports that IBM’s pension fund has dropped from the 8th best funded plan at the end of 2000 to 344th out of the 346 pension paying firms in the S&P 500 at the end of 2002. An $11.2 billion surplus that existed at the end of 2000 has disappeared. According to CNBC analysts, IBM must contribute $1.5 billion to the fund to meet Government mandated minimum funding levels. This will be the first contribution to the fund in 8 years. IBM is desperately looking for ways to make the profit statements look good to investors. Even though the pension fund was losing money at a record rate, IBM reported more than $1.4 billion in pension plan profits in 2001 pretax earnings according to the Washington Post. This vapor profit is allowable under distorted Federal Accounting Standards Board rules and is used in computing executive performance bonuses."


  • Age Discrimination at IBM.
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