Buying Back Shares to Shrink A Company?

We have long been skeptical of the value of share buybacks, especially when the shares are not attractively priced. Too often buybacks are done solely to reduce the number of shares to boost EPS in the hopes that bonus packages will be triggered.

Whatever the motivations of IBM management over the years, the spending of $165 billion to produce a market cap of about $100 billion must be questioned. Would not the money have been better spent on R&D and other investments to grow the business?

The extreme popularity of share buybacks over the past decade will likely produce many similar charts to the one below in the coming 10 years. Buybacks were once used primarily to purchase undervalued shares. The current practice is a cynical exercise pitting management interests against shareholders.

Unless the share price seriously undervalues the company, spending should be directed toward growth, or the business should be sold.

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