International Business Machines Corp. (IBM) has agreed to pay $10 million to settle claims related to the alleged bribery charges by the US Securities and Exchange Commission (SEC). IBM was accused of bribing South Korean and Chinese government officials for winning contracts.
The SEC alleged that IBM had paid $207,000 as bribes to South Korean officials from 1998 to 2003 to secure a $21 million contract for selling mainframes and personal computers to the government. .
The alleged payments were linked to IBM Korea Inc., a subsidiary of IBM, and LG IBM PC Co. Ltd, a joint venture of IBM and LG Electronics, in which IBM has a majority stake.
In China, the SEC claimed that employees of IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd., both wholly-owned IBM subsidiaries were involved in the practice of providing Chinese officials with gifts, paying for their overseas excursions and entertainment from 2004 to late 2009. The SEC also alleged that IBM employees created funds for gifting government officials with laptops, cameras and other such gifts.
Under the Foreign Corrupt Practices Act (FCPA), which prohibits corporations listed on US stock exchanges from bribing foreign officials, IBM’s settlement amount of $10 million includes $5.3 million in disgorged profits, $2.7 million in pre-judgment interest and $2 million in penalty.
IBM has grown in the emerging markets with double-digit gains and has added around $10 billion in terms of annual revenue from emerging markets since 2000. It expects emerging markets to account for 30% of its total revenue by 2015. In this scenario, the FCPA investigations and allegations would likely dent its image as a company that possesses the highest ethical standards in conducting its business.
IBM was earlier charged under the FCPA in the year 2000 when former top executives of IBM’s Argentine subsidiary made illegitimate payments to the executives of a government-owned bank in Argentina for securing a $250 million contract.
In our view, the strong growth that IBM is experiencing across all geographical regions, including the emerging markets worldwide will continue, given the company’s long-standing relationships in many regions. While investigations at this juncture could raise a few eyebrows, they are unlikely to come in the way of its growth plans.
We have a Neutral recommendation on IBM due to currency fluctuations, European weaknesses, decreased service contract signings, slower-than-expected IT spending growth and increasing competition from Microsoft Corp. (MSFT), Hewlett Packard Co. (HPQ) and EMC Corp. (EMC).
Currently, IBM holds a Zacks #3 Rank, implying a Short-term Hold rating.
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