The Wal-Mart bribery scandal is making headlines. The New York Times first broke this story over the weekend and it has been reverberating since then. The stock lost almost 5% of its shareholder value yesterday on this news.
Wal-Mart Accused of Bribery in Mexico
Mexico is currently Wal-Mart’s biggest international subsidiary. They have 2,100 stores and employ more than 200,000 employees there. They are actually Mexico’s largest private employer. There are companies in every country of the world that is engaged in this type of behavior. This is significant because of the scope and size of Wal-Mart.
It is alleged that Wal-Mart executives in Mexico engaged in systematic and widespread bribery of local government officials to do things like expedite building permits. Again, these weren’t isolated incidents. It seems like it was a part of the corporate culture in Wal-Mart.
This case is escalated to another level of significance because the top executives in the Wal-Mart main office allegedly knew about the bribery that was going on and covered it up. Apparently, they turned the investigation over to the Mexican executives who were engaging in the bribery to begin with.
If this happened as was reported in the New York Times, this means that Wal-Mart would have violated the Foreign Corrupt Practices Act on an institutional level. This act penalizes US companies that engage in unethical and corrupt business practices overseas.
This act was necessary because things like bribery are just a part of normal business life in developing countries. Although Mexico has made huge advancements in reducing corruption on the Federal level, there still remains a lot of corruption on the local level.
What This Means for Wal-Mart Stock
Wal-Mart’s stock price took a huge hit yesterday. It will probably continue to struggle as this story develops. Many experts have recommended to their large clients to divest of Wal-Mart stock for now.
In terms of the legal portion of this case, it will probably take at least a couple of years to run its course. You will probably see a multi-billion dollar settlement. You may even see some criminal prosecutions of senior executives. If that is the case, that will cause a decline in the stock price as well, but it should be short term until replacements are found and established.
Watch Wal-Mart Expansion in Foreign Countries
There is no doubt that the policy and procedures, especially in countries that have a culture of bribery, will be closely reviewed, scrutinized and changed due to this situation. This might slow down some of their expansion plans in places like China and South America where they have been expanding fast.
This expansion has already been baked into the stock price. That means if this growth slows down, you will probably see it reflected in the shareholder value.
There is a risk that other bribery scandals will pop up in other countries. If there is a culture of cover up at the top levels of Wal-Mart, Mexico may not be an isolated incident. If this does spread to other countries, it could pose a huge problem for Wal-Mart.
Fundamentals of Wal-Mart is Strong
In spite of this scandal and even in light of other potential ethical problems, I still think that the fundamentals of Wal-Mart are good. This cover up has little to do with their core business model. It has mostly to do with their rate of expansion.
Without the bribery, they will probably still grow because it’s a good business model. It just wouldn’t have happened as fast.
The underlying business is good and their systems are what make this a great company. Buying and selling high volumes with low margins and low prices remains a strong model for them that will continue their growth for many years.
Stock Market Trading Opportunity
This may be a great opportunity for short term traders. I think there will be a lot of volatility with Wal-Mart’s stock as the story develops. If you are good at getting a feel of the news and how it affects stock prices, this might be a good opportunity for you.
There are many more events to come that will affect the stock price. The story is still in its infancy. Wal-Mart has yet to really respond. We have not heard all sides of the story. We don’t know what is happening on the regulator’s side. There are political things happening behind the scenes.
Once it becomes more official, there may be shakeups in the top levels of this large conglomerate. That means you might see the CEO resign or even go to jail. You may also see other top managers step down or go to jail. You may even see board members step down.
There are still a ton of facts yet to be exposed. And we don’t know what is happening in other parts of the world.
With all of these potentially explosive developments, there is a lot of opportunity here for traders. But for long term investors, I think this is fundamentally a strong business. If the stock price drops, I think this may be a good contrarian investment strategy.