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|  | OCTOBER 26, 2004
By Mike France and Stephanie Anderson Forest What Cheney Did at Halliburton [Page 2 of 2] IMPOSSIBLE TO FORESEE? The one charge Cheney can't contest is that he failed to pay enough attention to the details. Even if he didn't know about the big 1998 accounting change, there's no doubt that he should have. And then there's his asbestos blunder. Cheney acquired tens of thousands of claims from Dresser along with the merger. This liability monster has depressed Halliburton's stock price for more than three years, driven several subsidiaries into bankruptcy, and could wind up costing more than $4 billion to resolve. Halliburton is now trying to set up a trust fund to cover future claims. For years, Cheney and his defenders have deflected responsibility for this debacle by arguing that the Dresser disaster was impossible to foresee. This claim has some superficial plausibility. After all, asbestos litigation has certainly exploded in recent years to engulf all kinds of companies that never made the cancer-causing fiber or sold products that contained it. "I don't think anyone in the industry could have anticipated or what-iffed this series of events in the due diligence process," says Lesar. NO SURPRISE. "Ambushed by asbestos" is a familiar story in Corporate America -- but this isn't Halliburton's story. Most of the asbestos liability stems from a one-time Dresser subsidiary known as Harbison-Walker Refractories, which used the material to make heat-insulating bricks. It was an early-generation defendant. By the end of 1997, a few months before the Halliburton merger was announced, Dresser already had 66,000 pending asbestos claims, according to securities filings. These were not all minor nuisance cases. In 1991, Harbison lost a $2 million jury verdict in Miami (which it ultimately settled for less). In fact, one of the key courtroom losses that caused Halliburton's stock to plummet in late 2001 -- an Orange (Tex.) case involving more than 105 plaintiffs that led to more than $100 million in damages -- was filed in 1994. So unlike, say, Ford Motor (F ), E&J Gallo Winery, or Goodyear (GT ), Halliburton cannot claim that its asbestos exposure was a big surprise. One of the main factors that made it willing to accept the risk was the fact that Harbison -- which had been spun off in 1992 -- had publicly agreed to indemnify Dresser for all post-spin-off claims. But there was good reason to question whether Harbison could hold up its end of the bargain. By 1997 asbestos had already driven more than 30 companies -- including many that made products like Harbison's -- into bankruptcy. Insolvency had essentially voided their indemnification obligations and forced asbestos victims to find deep pockets elsewhere, something that should have been a troubling omen to Cheney & Co. "THIS TRAIN WAS ROLLING." One other big red flag was flying: In June, 1997, the Supreme Court delivered an enormous blow to asbestos defendants in the case Amchem Products Inc. v. Windsor. The ruling held that companies could not settle future claims from people whose medical problems still had not materialized by setting aside trust funds in advance -- and thereby made it impossible to place a ceiling on long-term liability. Most legal historians now consider the Amchem decision to be the spark plug that reignited asbestos litigation and triggered the massive wave of cases that continues to this day. By the time Halliburton acquired Dresser, "there were attorneys on both the plaintiffs' and defense sides who could have told you that this train was rolling and that if you were anywhere near the tracks, it was going to run over you," says Stanford Law School professor Deborah R. Hensler, who has been writing about asbestos litigation for nearly two decades. Of course, hindsight is 20-20. Nobody in 1998 predicted that the reverberations from Amchem could possibly be so powerful. And Dresser was certainly not the last questionable asbestos acquisition anybody ever made. But it was one of them -- and it seems fair to hold Cheney and his advisers, who have acknowledged that they were briefed on the risks, accountable for a bad gamble. MAGNET FOR CONTROVERSY. Next to the asbestos fiasco, Cheney's legacy is mixed. The Dresser acquisition did strengthen Halliburton's energy franchise by bolstering its position in liquefied natural gas, drill-bit manufacturing, and directional drilling. Along with the other deals, it helped turn the company from a "heavy-iron" manufacturer into a more dynamic high-tech service provider. "Landmark and Numar were very solid transactions," says analyst Pickering. Cheney's other major move was bolstering Halliburton's engineering and construction business. He did this, in large part, by merging Dresser's M.W. Kellogg subsidiary with Halliburton's own Brown & Root. The resulting combination, now known as Kellogg Brown & Root, has turned into a magnet for controversy. A $2.5 billion energy project off the coast of Brazil has racked up losses of $762 million over the past three years. And KBR has been at the center of recent allegations of misdeeds surrounding its contracts in Iraq. In September, Halliburton CEO Lesar announced that he's considering selling or spinning off KBR -- a move that would effectively renounce one of his predecessor's key decisions. "AN AVERAGE JOB." To be fair, the controversy that has surrounded KBR probably wouldn't be as hot if Cheney weren't Vice-President. But it'S also true that had Cheney never left Halliburton, he still would have been under the gun. "Overall, Cheney did maybe at best an average job," says Jason E. Putman, an energy analyst at Victory Capital Management, which holds some 2.3 million shares of Halliburton. Cheney's tenure is nothing to brag about. That much is certain. But it's also true that he's not the corporate villain his political opponents would have him be.
 France is Legal Affairs editor for BusinessWeek in New York. Forest is a correspondent in BusinessWeek's Dallas bureau Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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