The Dangers Behind Wal-Mart's Buyback

NEW YORK ( TheStreet) -- Wal-Mart ( WMT) announced a new $15 billion buyback plan during its annual meeting on Friday. But is the repurchase program really a good thing for investors?

The $15 billion plan replaces its existing plan, which had $2.7 billion left as of the end of the first quarter. Wal-Mart has announced new repurchase plans in four of the last five annual meetings.

Even though the new repurchase plan was expected, Wall Street rewarded the retail behemoth, with shares gaining 11 cents on a day when most of the market was in the red.

>Wal-Mart Annual Meeting: Live Blog

But no one is addressing one major concern with the $15 billion repurchase plan -- that it nearly guarantees that within a few months the Walton family will control over 50% of the common stock. This would allow Wal-Mart to qualify for the "controlled company" exemption on the New York Stock Exchange, which means that this could be the last shareholder meeting where the company is required to maintain an independent board or complete independence on key committees.

CtW Investment Group, which works with pension funds sponsored by unions, sent a letter to Wal-Mart expressing its fears. "This is a serious cause for concern among Walmart shareholders, particularly in light of the company's recent changes in executive compensation that appear to de-link pay from performance on key metrics, and continued questions regarding the independence of two directors due to significant related party transactions, M. Michele Burns and current presiding director James W. Breyer,"

As of March, the founding Walton family owned about 48% of shares, up from about 38% in March 2003.

"I have to wonder if these aggressive share repurchases of the past three years were designed to reduce the share count so much that the 'controlled company' provision was triggered," says Wall Street Strategies analyst Brian Sozzi. "Then, I have to wonder why the company would want to do this, which from what I can see is to regain a strong hold on the future direction of the company, which is poised to change dramatically in its 'global' push. From a shareholder perspective, I want to see them maintain complete independence on key committees; power in the control of a few, especially with such a large global company, is not friendly."

Wal-Mart said it will not opt to utilize the NYSE exemption.

"We have no current plans to rely on any of the governance exemptions available to 'controlled companies' under the NYSE rules, if and when they may become available, or to make any other changes to our governance structure," says spokesperson, Greg Rossiter. "As Rob Walton noted in his Chairman's letter to shareholders in our annual report, our board remains committed to strong corporate governance. We have maintained a separate Chairman and CEO structure since 1988, and our board members represent varied experiences covering retail, technology, financial, brand management, strategic and global expertise."

Reducing the number of shares outstanding generally helps support a company's share price. But Wal-Mart's buybacks haven't done much to move shares, with the stock up around 7% for the 12-month period.

-- Written by Jeanine Poggi in New York

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