IBM’s woes are interesting not simply because they tell us about the economy, but because they reveal broader truths about how, and for whom, companies are run.

IBM kicked its 2015 operating earnings goal off the back of the truck last Monday, blaming an outright fall in third-quarter revenues on a sudden downturn in client spending.

"We saw a marked slowdown in September in client buying behaviour, and our results also point to the unprecedented pace of change in our industry," said Ginni Rometty, IBM chairman, president and chief executive officer.

IBM shares fell more than seven per cent in reaction, giving up more than three years of gains.

In all likelihood, IBM isn’t just a company which ran into an inflection point in the broader economy, nor is it simply an unlucky victim of the steep change in the pace of technological innovation.

It is a company which did this after five to 10 years of following one of the most popular corporate strategies out there: prioritising financial engineering over investment, and giving primacy to living quarter by quarter rather than for the longer term.

The result, and IBM is far from being alone here, is a company left with a hollowed-out core franchise which has been deprived of investment, combined with higher debt loads.

From 2000 to 2013, IBM pursued an epic campaign of buying back shares, flattering earnings but perhaps at the expense of investment in the future, something which, as a technology company, is promised to no one.

During that period IBM spent more than $108 billion on share buybacks and an additional $30 billion on dividends. That compares to just $59 billion on capital expenditure. That produced a doubling of pre-tax profit margin during the period, but arguably at a cost to the value of the core franchise, which looks less and less defensible.

Indeed, in the last six years, the company's debt load has roughly tripled but sales are essentially flat. In July, hedge fund manager Stanley Druckenmiller drew a line between that strategy and Federal Reserve policy, which he said encourages companies to stint on productivity improvement and investment in the real economy and instead use cheap money to borrow and buy back shares.

Buying back shares improves profitability per share, a strategy which tends to work so long as investors believe it is not done at the expense of the company’s ability to remain competitive.

IBM may simply be the unlucky victim of market forces as technology evolves.

But it is hard to look around the US economy, which has had a combination of very high profit margins and very low capital investment, and wonder if many publicly traded companies are in similarly vulnerable positions.

"In our view, IBM is not different from companies like Cisco, Microsoft, Oracle and Intel, " Geneva-based Lombard Odier fund manager Eurof Uppington said via email.

“They all face the same sort of pressures from new trends like cloud, mobility and superscale Internet and are all reacting in the same way using financial engineering. IBM is probably just early.”

Lombard Odier has been critical of what it calls the GOSOBB strategy, as in Giving Out Stock Options and Buying them Back.

While, under accounting rules, this flatters operating earnings, it masks how much money is actually going home in employees’ pockets as compared to if share options were cash payments.

Had IBM wanted to offset the dilution caused by employee share options in the five years to mid-year, it would have needed almost $18 billion in share buybacks, or about a third of all buybacks made during the period. IBM are far from unique, much less unusual, in the scope of those figures.

The broader unanswered question here is how best to manage a technology company, or indeed an economy, during a period of very rapid technological change.

The market tends to assume company revenues are far stickier, far more permanent than they actually are. That assumption grew out of 100 or more years of analysing and investing in industrial companies which, while buffeted by war, globalisation and technological change, had the luxury of operating in a more slowly changing world.

That assumption, that tendency of financial markets to focus on the per-share earnings figure without giving due care to all of the many forces which make those revenues possible, may leave investors today very vulnerable.

A decade of share buybacks and underinvestment is starting to look like it may have been a mistake. (© New York Times)