I.B.M. Will Move Faster to Fill Its Pension Fund Gap

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I.B.M. Will Move Faster to Fill Its Pension Fund Gap

By STEVE LOHR

NY Times, December 5, 2002

In an effort to put the issue of pension fund obligations behind it, I.B.M. announced yesterday that it planned to put $3 billion in cash and stock in its United States pension fund this year.

The move is a shift from the approach International Business Machines described last month when it told analysts that the projected shortfall was $4.5 billion and that it would put in roughly $1.5 billion a year for three years to close the gap.

Industry analysts interpreted the I.B.M. decision, approved at a board meeting yesterday, as a sign of strength in that its strong balance sheet and ample cash flow give the company the freedom to deal with the pension issue swiftly.

I.B.M. noted that the improvement in stock prices in recent weeks had narrowed the calculated shortfall to $3 billion. The company also noted that interest rates were currently low so it seemed an opportune time to make the move.

"I.B.M. has the wherewithal to do this," said Laura Conigliaro, an analyst at Goldman, Sachs. "And I.B.M. is behaving like a homeowner, financing this now, when interest rates are low."

I.B.M. shares, which fell $1.52, to $83.69 in regular trading, rose as high as $84.50 after hours.

John R. Joyce, I.B.M.'s chiefgs in 2003.

The pension move will increase I.B.M.'s debt load over the next year, but Mr. Joyce said I.B.M.'s debt rating should not be affected. Moody's and Standard & Poor's have already confirmed that their ratings will not change, Mr. Joyce said, while Fitch is still reviewing its rating.

The broad decline in stock prices over the last two years has shrunk the value of corporate pension fund assets, sharply reversing the trend of the late 1990's, when the run-up in stock prices led to overfunding of pension funds. That allowed companies to lift their reported profits during those years because of the pension surpluses. I.B.M. was one of the prominent companies that enjoyed an earnings increase because of increasing pension fund values.

Yet with the decline since 2000, the projected surpluses have turned to shortfalls for I.B.M. and other companies. "This is a decision that all companies are going to have to face that have pension funds," Mr. Joyce said. "We decided to deal with the pension gap now."

The company's United States pension funds represent about two-thirds of I.B.M.'s worldwide pension obligations. Of its six overseas pension plans, Mr. Joyce said two were overfunded and four were underfunded. The underfunded plans will continue to receive gap-filling contributions of "several hundred million dollars a year," he said.