The IBM Dollar continued

Benefits

First, by choosing the discount rate on its currency, IBM would have a cheap and simple way of raising money which did not dilute the company's equity or impose a heavy debt burden.

Second, IBM would attract - and would even lock in - the future purchasers of its products. As computer products become more and more of a commodity, the non-product integrated values become more and more important.

Third, IBM would in effect be making forward sales to suit its own needs and plans.

Fourth, intending purchasers of IBM product would have a cheaper method of purchase. They might even decide that buying IBM dollars was the best way to invest their money. If they did not buy IBM dollars in advance, they could always buy them from investors just before an IBM purchase. In terms of its own financial planning, it might suit a corporation to buy IBM dollars - though this would depend on the legal and tax positioning of such instruments.

Fifth, investors would have a low-risk investment with a high rate of return and an almost guaranteed selling price (this could also be underwrit­ten by a third party or by an IBM-guaranteed repurchase agreement).

Risks

What would happen if IBM went belly up and ceased to exist? Inevitably, the IBM dollar - unless underwritten by a third party - would become worthless.

But if IBM ceased to exist, then IBM shares would also become worthless, and so would its debts (according to agreed schedules of ranking). When the IBM share price recently fell from a peak of $176 to a low of $46, the shareholders took that full loss. Such a fall in the share price would have no effect at all on the holder of IBM dollars, which would return the full expected appreciation.

It is also possible that if IBM did cease to exist, then IBM dollars would qualify for repayment ahead of other obligations because they are, in reality, a form of advance purchase. Trade creditors normally rank ahead of investors in a liquidation.

A second risk is that IBM might push its prices up. If intending IBM purchasers bought the currency at a discount of, say, 20 per cent and IBM then raised its prices relative to the rest of the industry by 20 per cent, they would be no better off - and perhaps worse off because they could have used their money better elsewhere. However this is not a very realistic scenario. Unless all IBM purchases were to be made with IBM currency, normal market pressures would prevent IBM from raising prices out of line with other suppliers.

An intending purchaser might feel that IBM would be unlikely to offer normal trading discounts if a purchase was to be made with IBM dollars.

In practice, the way to get round this problem would be for the purchaser not to declare the final form of payment until a deal had been agreed. In any case it could never be in IBM's longer term interest to discriminate against the users of IBM dollars.

A potential objection might be the impact on IBM itself.

Depending on the discount rate chosen, it could hurt IBM's profitability if too many IBM dollars were issued at too cheap a rate. So IBM would have to limit the issue of IBM dollars to some fraction of sales revenue. For example on yearly sales of $60bn, IBM might issue only $6bn in target currency.

There might be a risk for third party investors (i.e. those who had no

intention of ultimately buying IBM product) that no IBM purchasers

would want to buy their IBM currency. However, as stated earlier, even if the discount rate were slight, any IBM purchaser would be logically 

obliged to take it. It would be up to market forces and third party investors to decide how much of the discount to pass along to real IBM customers.

Any intending IBM purchaser who then changed his or her mind and decided to buy from another supplier would be in exactly the same position as a third party investor: he or she could sell on the IBM currency that had been purchased.

Would the value of the IBM dollar be affected by product risk? Suppose IBM competitors produced models which were perceived to be better than IBM products. Would holders of the IBM currency see a fall in the market value of their currency?

If IBM models were so bad that IBM actually went out of business, then clearly the holders of IBM currency would be in a similar position as (though ranking ahead of) shareholders. But so long as IBM was selling product of whatever quality, then the IBM dollar would be just as valuable for purchasing that product - and purchasers would logically need to acquire the currency even if the discount was low. Suppose IBM dropped prices to attract back customers who had been tempted away by a rival's technically superior products, the IBM dollar would still have the same high value as before. It is only if IBM's total sales fell very sharply, and if too much IBM currency had been issued, that the value of the IBM dollar would actually fall in the market.

Finally, a guarantee by IBM or an independent underwriter to repur­chase IBM currency at a set price would remove all remaining downside risks.

Page 2 of 3

(c) Copyright Edward de Bono Ltd, trading as de Bono