Wal-Mart May Have Botched Mexico Probe, Buffett Says

The Berkshire Hathaway Annual Meeting
Warren Buffett, chairman of Berkshire Hathaway Inc., tours the vendor floor during the Berkshire Hathaway annual shareholders meeting in Omaha. Photographer: Daniel Acker/Bloomberg

Billionaire Warren Buffett, whose Berkshire Hathaway Inc. is among Wal-Mart Stores Inc.’s largest shareholders, said the retailer may have botched how it dealt with allegations that the company bribed Mexican officials.

“It looks like they may well have made a mistake in how that was handled,” Buffett, 81, told shareholders today at Berkshire’s annual meeting in Omaha, Nebraska.

Wal-Mart, the world’s largest retailer, said April 21 it had started a probe into its Mexican operations after the New York Times reported that executives bribed officials to fast-forward expansion. The U.S. Justice Department is also investigating, people familiar with the matter have said.

Buffett, whose company owned 39 million Wal-Mart shares, or more than 1 percent of the retailer at Dec. 31, has been outspoken on corporate governance in the past, using the annual meeting, his shareholder letter and public appearances to offer views on management practices. He’s recently criticized Johnson & Johnson for lapses and has said companies that undergo scandals can be resilient.

Buffett, who called the Wal-Mart investigation “a huge diversion of management time,” said that the probe is unlikely to have a long-term effect on the Bentonville, Arkansas-based company’s financial strength.

“I don’t think the earning power of Wal-Mart five years from now will be materially affected by the outcome of this situation,” Buffett said. “It may result in a significant fine, but I don’t think it changes the fundamental dynamic.”

Wal-Mart has declined 6 percent to $58.70 since April 20, the last trading day before the Times’ story was published.

Two-Hour Negotiation

Buffett has done business with Wal-Mart for more than a decade, and has cited the company as a model of accounting and management. He agreed to lend the retailer $125 million in 2002, people with knowledge of the matter said at the time, and has shared his opinions with Wal-Mart managers during their weekly sales meeting in Bentonville.

In 2003, Buffett bought Wal-Mart’s food distribution unit for about $1.5 billion. McLane Co., which delivers food and alcoholic beverages to drug stores, convenience stores and warehouse outlets, still counts Wal-Mart among its largest customers. The retailer contributed about 30 percent of McLane’s $33.3 billion in revenues last year, according to Berkshire’s annual report.

Buffett said in a 2004 letter to investors that he bought McLane after a two-hour negotiation and without any due diligence. “We knew everything would be exactly as Wal-Mart said it would be,” Buffett wrote. “And it was.”

’Too Many Mistakes’

Another Berkshire holding, Johnson & Johnson, was ordered last month to pay more than $1.1 billion in fines after an Arkansas jury found the firm misled doctors and patients about the risks of antipsychotic medication Risperdal. The New Brunswick, New Jersey-based maker of health-care products has also struggled with recalls of artificial hip implants and over-the-counter medicines. Berkshire sold 8.4 million J&J shares in the fourth quarter of 2011, leaving it with a 29 million share stake at Dec. 31, according to a regulatory filing.

“It’s still got a lot of wonderful products and it’s got a wonderful balance sheet and all of that, but there have been too many mistakes made at Johnson & Johnson,” Buffett told CNBC in a Feb. 27 interview, adding they “clearly haven’t lived up to their own standards.”

The investor has said that strong companies that run into difficulties, such as Toyota Motor Corp., can eventually recover. The automaker recalled more than 8 million vehicles in 2009 and 2010 after reports of unintended acceleration.

David Sokol

“If you look at any of the great companies at one time or another they have had a setback,” Buffett said at a May 2, 2010 press conference in Omaha. “Toyota will be a major auto company far beyond my lifetime.”

Buffett was pushed to apologize at last year’s meeting for his oversight of David Sokol, a former Berkshire manager who invested in a firm he pitched as a buyout candidate. Sokol, 55, once considered a possible successor to Buffett, was accused by Berkshire of violating its insider-trading policies and left the company in April 2011.

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