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IBM Sees Buying Opportunity for Itself

The company will buy back $1 billion of stock sooner than expected.

SAN FRANCISCO --

IBM's

(IBM) - Get Report

plan announced Monday to

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step up its pace of repurchasing shares follows a consistent theme playing out at the company this year.

Big Blue has been an aggressive buyer of its stock since rolling out an ambitious plan in May to nearly double its earnings per share through a combination of gross margin expansion, stock buybacks and adjustments to its pension plan contributions.

Chief Financial Officer Mark Loughridge has said that the three-part plan should help IBM boost EPS at a 16% compound annual rate, reaching $11 by 2010 from $6.06 at the end of the last fiscal year.

In May, IBM piled on $11.5 billion in debt to accelerate its buybacks with the immediate repurchase of $12.5 billion in shares. At the time, the company estimated that the buybacks would add two to three percentage points of growth to annual EPS.

Monday's move looked modest by comparison. IBM said it will repurchase up to $1 billion in shares by the end of February instead of the originally planned March-to-April timeframe. The company estimates that the additional buybacks could have a slightly positive effect on 2008 EPS.

IBM will use the $13.8 billion in cash on its balance sheet to make the repurchases. Once complete, the additional buybacks will have used up more than half of the $1.7 billion remaining from its current share repurchase authorization.

The stepped-up timing of the buybacks lets IBM take advantage of a pullback in its stock price.

IBM shares were recently trading up $1.23, about 1.2%, to $106.41, but are 11% below their highest closing price of the year, $119.87, reached on Oct. 16.

A difficult question to answer is whether the money would have been better used paying down debt. In the last quarter, IBM repaid $500 million that was taken on to start the buyback acceleration earlier in the year. That helped to reduce its debt-to-capitalization ratio, excluding debt from its financing arm, to 40.3% from 46.7%.

Jesse Greene, architect IBM's accelerated share repurchase plan, says the decision to buy back shares stems in part from the attractiveness of the current share price, as well as the time of year, among other factors. For IBM, the fourth quarter is typically the strongest, giving the company an added layer of comfort that it will have the cash to replenish its coffers.

"It should have a relatively minor effect on our liquidity ratios and balance sheet," says Greene.