GM and IBM
There would seem to be little in common between GM, the fallen idol of American industrial prowess, and IBM, the still proud symbol of American technological prowess. Indeed, there could hardly be a greater contrast than General Motor’s decades of gradual decline, punctuated by repeated failures of efforts to ‘re-invent’ itself, and IBM’s dramatic recovery from downward spiral in the early nineties, to its renaissance during and after the high-tech boom and into the new century.
Yet, notes Doron Tsur, there are striking similarities between the two giants – and they should make us feel very uncomfortable, not just about IBM, but about many American corporate giants in a broad range of industries. Did I hear you ask “who the hell is Doron Tsur?” He’s an Israeli corporate analyst and money manager. To which the response must surely be, “what do I care what Doron Tsur says or thinks? Aren’t there enough American corporate analysts, let alone money managers? And what have they ever done for me, other than to waste my time with their biased babble and – if I listened to them – waste my money, too.”
Fair enough. There are two ways to answer that. First, ad hominem. Doron Tsur, apart from being a nice guy, is an extremely rare specimen. Not only does he understand corporate accounts and actually reads the notes at the back, in which all the juicy stuff is buried — in my opinion, he is world class at that – but he also likes writing about his findings, and is actually very good at that too. He’s had a weekly column in The Marker for some years, and has appeared in other papers, sharing his analysis and views. His latest article, about IBM and GM, can be found at http://www.themarker.com/tmc/article.jhtml?ElementId=skira20090125_1058284
The second answer is that if you read his stuff, you’ll probably conclude that he isn’t wasting your time, and if you follow the views and ideas in them – and especially his warnings – you’ll almost certainly benefit. However, since the article is in Hebrew, let me briefly summarise its findings. His headline — “where did half of IBM’s own equity disappear to?” — relates to the amazing fact that “Big Blue’s” recently published results show the company’s equity, which stood at $27bn as of September 30, shrinking to $13.5bn by the end of the year.
Arguably, the fact that the financial media did not highlight this development is even more amazing. But, as Tsur notes, this is par for the course for the financial media, which has been trained to look at certain numbers, all from the profit-and-loss statement, and report accordingly. In the case of IBM, whilst sales fell, net profits exceeded analysts ‘forecasts’ (these are merely a relaying of ‘guidance’ provided by senior management to the charlatans masquerading as analysts) – so the message was that IBM was doing fine, the recession was not that bad and, hey presto, the company’s share price rose. But the balance sheet told a very different story.
Under accepted accounting rules, IBM’s corporate pension fund is not included in its balance sheet – although the company is liable to pay the pensions of its past and present employees and, to do so, it must invest their pension savings in financial and other assets. However, in line with most American (and British, Dutch and Irish) pension funds, IBM’s is heavily invested in equities and therefore suffered massive losses last year, to the tune of 21% of its assets. The resulting huge hole in the company’s pension liability had to be made good — by IBM, with its own money. That’s why its equity halved in one quarter.
All this generated a sense of déjà vu for Doron Tsur, because he had written a piece two years earlier, noting a sudden 25% drop in IBM’s equity. Worse still, six years ago, in January 2003, he had written how General Motors had lost two thirds of its equity in the last quarter of 2002, when the previous bear market punched an abyss in its pension assets. It turns out that most veteran American companies are carrying pension assets and liabilities that exceed, and sometimes dwarf, their ‘official’ balance sheets – but these are not included in the company’s published accounts.
GM bled to death because of its pension fund and health care liabilities, not because of the quality and quantity of the vehicles it sold. In other words, the primary business of GM, IBM and many others is actually asset-liability management. They are financial institutions, with manufacturing and service sidelines. If these companies’ financial asset portfolios suffer severe erosion in a prolonged bear market, they may all end up like GM. But, thanks to the misleading and distorted way corporate accounts are presented and the failure of most ‘professional’ analysts to probe beneath the surface, you won’t know about it until too late.