Companies use diverse approaches to enhance shareholder value, as there are numerous options to choose from depending on what an organization considers suitable. Many firms opt for financial engineering, which is a success guaranteeing strategy in most cases to increase shareholder value. Light (2020) asserts that the financial engineering approach is highly recommended because it is centered on a critical review of financial data and is applicable regardless of the size of an organization. Firms can determine the most suitable methods of increasing their stock value, among other decisions to enhance their valuation. Nevertheless, a business does not need to be undergoing any challenges to resort to these initiatives, which explains why a corporation can start the process at any time. IBM, which is the company of interest in this paper, could potentially utilize a combination of various financial strategies to boost its stakeholder value by altering the organization’s capital structure to a more stable form, as stock repurchase approaches, dividend policy reviews, and debt reduction initiatives may be necessary.
Overview of the Company’s Financial Standing
The International Business Machines Corporation, popularly denoted with the abbreviation IBM, is among the world’s leading computer manufacturers. The company’s main competitors include Apple, Dell, and Hewlett-Packard (HP), among others. IBM, with its headquarters in Armonk, New York, has a long history in the tech industry, as it was established back in 1884. In addition to the manufacture of computers, the company produces software programs and offers hosting services. IBM has since expanded to become one of the leading technology companies globally, which makes it a worthwhile case study on how corporations could increase their stakeholder value. Table 1 presents an overview of the company’s financial standing, as can be deduced from the analysis of its financial ratios, which are compared against those of Apple, one of the fierce rivals in the tech industry.
Table 1: IBM vs. Apple Financial Ratios (“Comparison analysis based on SEC data,” 2020).
The weighted average cost of capital (WACC), often given as a percentage, refers to the rate at which a company should be paying its security holders for sustainable financing of assets. Also referred to as the cost of capital, the WACC figure signifies a company’s capacity to cater to its assets through debt and equity, as these are usually the primary sources of business funding. In essence, each source is weighted based on how it is used, and the average is used as a pointer of the interest that the firm in question should pay for each dollar. In the case of IBM, the weighted average is 5.73%, and the return on investment capital (ROIC) is 7.10% (“International business machines,” 2020). These figures indicate that IBM has been generating a relatively higher ROI compared to the cost of raising the capital. Ostensibly, a company that seeks to continue generating high returns must institute mechanisms to maintain a growing WACC.
Subjective Impacts
The industry and markets in which IBM operates are highly dynamic and volatile due to the ever-changing nature of technologies and evolving consumer needs. As is the case in many other industries, tech companies must adopt unique approaches that give them a competitive advantage. As such, the financial engineering strategy must be anchored on the key factors rendering IBM a competitive player against Apple, Dell, and HP, among other computer manufacturers. Hence, a detailed SWOT analysis is necessary, as it gives a succinct glimpse of the firms’ position in the tech industry. The decision and choice on what financial strategy could help enhance the company’s capital structure and improve stock value can then be made based on substantial data and information. In effect, the chances of realizing both long-term and short-term benefits to shareholders will increase.
Table 2: SWOT Analysis (Rowland, 2017).
Possible Financial Engineering Strategies
Capital Expenditure
A review of the challenges facing IBM, particularly the threats identified through the SWOT analysis, shows that the company might require a redesign of its supply chain system. Particularly, changing preferences among consumers in favor of online purchases are shown to be a significant threat to IBM’s physical infrastructure. The organization might have to dedicate resources to the exploration of online-based marketing and distribution systems. The cost associated with this capital expenditure, much as it might be difficult to quantify, may increase with time because of the uncertainties of digital marketing and distribution channels. In any case, IBM’s WACC and ROIC ratios indicate that IBM has been generating a relatively higher ROI relative to the cost of capital investments. Even then, IBM can leverage its masterly of technologies to establish an elaborate supply chain system. The financial costs of using the capital expenditure approach will certainly be justified by the long-term growth once the company gains an expended share of existing and emerging markets.
Mergers and Acquisitions
IBM’s record of mergers and acquisitions is reportedly among the company’s strengths, although not all attempts have been successful. The company should consider softening its rigid culture for easy mergers, as it is apparent that firms must find a compromise in their organizational structures and cultures to work together. In essence, IBM should explore the option of cooperating with already established companies in targeted global markets. That way, it would be much easier to adapt to liability policies in different countries. Nevertheless, acquisitions are recommended as they would help alleviate competition due to the rising number of new entrants.
Stock Repurchases
The company may consider the option of stock repurchases as a strategy to boost its shareholder value. This approach may require IBM to re-absorb a particular share of its ownership from investors. Usually, the process involves buying back the company’s shares from investors in a bid to boost corporate valuation. The level of dividend yield, which is 3.543%, can significantly increase if IBM used this approach. Besides, the earnings per share rate would similarly escalate to the advantage of investors. However, this method is least preferred because it does not culminate in the company’s growth, which is necessary for the certainty of long-term shareholder value creation.
Dividend Policy Change
A company seeking to enhance its shareholder value can also consider adopting a new dividend policy, especially if existing approaches have not been profitable. For instance, a firm may opt to increase, decrease, and stock split depending on the purpose of change in dividend strategy. As IBM wants to increase its shareholder value, it is evident that the management should adopt mechanisms to reduce the number of shares, which will culminate in increased valuation. Otherwise, stock splitting, which leads to a more or increased number of shares, would trigger a decline in the market price. Therefore, a policy change to activate a rise in the cost of individual shares, coupled with several other initiatives, is needed to enhance the company’s shareholder value.
Debt Reduction
A critical review of the debt-to-equity ratio is necessary for the determination of appropriate measures and initiatives for financial engineering. In essence, a company must be able to function optimally while creating value for its shareholders. The debt-to-equity financial ratio signifies the relative proportion of a firm’s equity against the debt used to fund the organization’s assets. A reduction in debt means that this ratio increases, although with a concurrent reduction in asset financing. Possible implications may include the inability to continue operating optimally, although it gives the business the opportunity to focus on self-sustenance. IBM might have to consider debt reduction, although it is necessary to direct more of the plowed-back revenues to critical areas, such as research and development. Nevertheless, the review of subjective impacts shows that the tech giant lacks the vigor for research and development needed to match the level of innovativeness seen in other tech firms, such as Apple and Google.
Expansion to New Geographical Markets
IBM must consider the option of global expansion into emerging markets in different countries throughout the world. The ability to venture and establish itself as a competitive player in emerging markets has been identified as one of the critical IBM’s strengths. Besides, the company has a stable cash flow, which can be used to support the establishment of contemporary supply chain channels needed for expansions to new geographical markets. The current ratio of 1.40 indicates that IBM has the capacity to cater for short-term obligations with ease, an indication that it can be possible to explore international markets for increased company valuation. This move must be approached cautiously to avoid venturing into unfavorable markets, especially in low-income markets dominated by counterfeit products. Nonetheless, a review of the threats facing IBM and the larger tech industry shows that the rise in the number of substandard items retailing at relatively lower prices compared to genuine products is a major threat.
Introduction of New Products and Services
IBM may consider the option of expanding the company’s product line. However, a wider scope of products might require diversification and increased capital investment. The company might have to invest more in research and development, as the ability to close existing production gaps largely depends on the level of innovativeness. This will be a commendable move, as it will render IBM more competitive against rivals since royal customers will no longer lack options or choices of the company’s products and services. Nevertheless, the corporation has established itself as an innovative brand thriving on the latest technologies and innovations. This strategy is a viable option considering that IBM has a reliable cash flow, which is crucial for the facilitation and funding of innovations and new projects. In the long-term, the company will actualize the vision of increased shareholder value by blending financial engineering strategies.
References
Comparison analysis based on SEC data (2020). Ready Ratios. Web.
International business machines (2020). Guru Focus. Web.
Light, L. (2020). Financial engineering can destroy brands, but there is a way forward.Journal of Brand Strategy, 9(1), 18-26. Web.
Rowland, C. (2017). IBM SWOT analysis & recommendations. Panmore Institute. Web.