International Business Machines -- the giant computer maker that had never borrowed a dime from the public until last October, when it borrowed $1 billion -- expects to seek more money this year.
IBM Senior Vice President Paul Rizzo told security analysts in Pittsburgh today that he doubted the company would sell stock. Instead, according to Dow Jones News Service, IBM probably would sell either bonds or notes.
"Hopefull, there will a fixed-income market to go to," Rizzo said, an allusion to the near-total collapse of the bond markets in recent months, as prices of the fixed-income securities have declined and interest yields have soared.
IBM's sudden need for funds is due to the growing numbers of its customers that are choosing to lease IBM computers rather than buying them. It takes longer to recover the costs of developing and producing a computer when it is leased rather than purchased -- although long-run profits may be the same or greater.
For example, in 1979 IBM made capital expenditures of $6 billion. About $4.2 bilion of that went to finance IBM's computer leases to its customers. Rizzo said that if the trend towards leasing continues, IBM expects to spend more than $4.2 billion to finance its rental equipment this year.
Rizzo did not give an indication of how much IBM plans to borrow this year -- presumably because it depends on how many of its computers are purchased rather than leased.
IBM has taken certain steps to try to reverse the trend toward leasing among its customers. It has raised most of its rental and lease prices, effective April 1, but did not raise the purchase price for its new System 370 computers or for its large scale Series 3000 processors.
Leasers of IBM equipment are able to build up "purchase option credits" and IBM hopes the higher lease prices will entice many of them to buy their equipment.
However, with sharp increase in interest rates -- the prime rate is close to 17 percent -- many buyers may still find it unattractive to finance the purchase of the computers and continue to lease. IBM will help finance a conversion from lease to purchase at an interest rate 1 1/2 points above the prime rate.
Last year, in what should have been one of the landmark offerings in history, IBM sold $500 million in seven-year notes and $500 million in 25-year bonds to the public.
But just after the deal was signed and underwriters began to sell IBM securities to the public, the bond market began to deteriorate and Treasury bonds and other bonds began to sag -- wiping out nearly all the differential between the IBM offering and the Treasury.
Then the Federal Reserve's inflamous Oct. 6 announcement of a tighter monetary policy hit, and what had been a bond market decline became a bond market rout. Underwriters had grave difficulties selling the IBM securities.
IBM was in good shape -- it got its check for $987 million (the difference between that and $1 billion representing fees to underwriters and a slight discount from face value on the securities.)
But underwriters lost millions of dollars because they had to sell the IBM securities they held well below what they paid IBM for them because of the sudden, sharp decline in bond prices.
In retrospect, despite the losses taken by the underwriters, it appears that IBM picked the right time to sell securities. It paid about 9.41 percent on the 25-year bonds. If it sold them today -- after two months of even more severe price declines than happened in October -- the computer maker would have to pay 14 percent or more.
Besides the $1 billion securities offering IBM sold to public investors last year, it also sold a special private placement of $300 million of notes to Saudi Arabia.