WASHINGTON,
July 31 - With Washington focused on corporate
responsibility, Vice President Dick Cheney's
tenure as chief executive of Halliburton is
under scrutiny from government investigators
and his political opponents.
Most
of the attention has been focused on a Securities
and Exchange Commission investigation into changes
made by the company in its accounting practices
for construction projects while Mr. Cheney led
Halliburton.
But
the company and its shareholders have also suffered
from the hidden costs from a deal that was,
at the time, the high point of Mr. Cheney's
five-year Halliburton career: his acquisition
in 1998 of Dresser Industries. The deal, which
Mr. Cheney hailed as a "win-win" merger, ended
up saddling the company with the growing costs
of legal claims from people who say they were
injured by or are at risk from asbestos in products
made by Dresser and a former Dresser subsidiary
that was spun off in 1992.
Mr.
Cheney's office said the Halliburton-Dresser
deal was thoroughly vetted at the time. Halliburton
said the degree of the asbestos problems could
not have been anticipated at the time of the
merger.
At
issue now is whether Halliburton under Mr. Cheney
was aggressive enough in investigating the asbestos
liabilities it was taking on in acquiring Dresser,
and whether it adequately informed shareholders
of the risks at the time they were asked to
approve the deal.
Previously
undisclosed court documents show Dresser was
notified a month before the merger that it might
face greater asbestos liability from its former
subsidiary than it had disclosed. Halliburton
said it was kept in the dark by Dresser about
the greater risks until after the merger was
completed.
Halliburton's
stock price has fallen sharply as the extent
of the asbestos problem has become clear since
Mr. Cheney left the company to join the Republican
presidential ticket in August 2000.
Mr.
Cheney sold nearly $40 million in Halliburton
stock about the time he left the company at
prices above $50 a share. He had said he would
sell his Halliburton stock if the Republican
ticket prevailed in the fall. The stock closed
today at $13.20.
The
seeds of Halliburton's asbestos problems date
back to 1992 when Dresser spun off a subsidiary,
the Harbison-Walker Refractories Company, that
made industrial products containing asbestos,
like bricks and pipe coatings. At the time,
Dresser and Harbison-Walker signed an agreement
dividing up responsibilities for asbestos claims.
Since
the 1970's, companies in a variety of industries
have been subject to lawsuits from people claiming
to have been exposed to asbestos, which can
cause lung disease. Many companies view the
suits as attempts by lawyers to win unjustified
awards from juries. Although most of the cases
are settled for small sums, some have led to
large verdicts. Dozens of companies, including
Johns Manville, American Shipbuilding and W.
R. Grace, have filed for bankruptcy protection
because of asbestos lawsuits.
In
late 1997, Halliburton and Dresser, crosstown
rivals in Dallas that had circled each other
for years, began exploring the possibility of
a merger. Their chief executives, Mr. Cheney
and William E. Bradford, handled most of the
discussions, one of which took place during
a quail hunt in South Texas on Jan. 17, 1998.
In
February, the boards of both companies approved
a deal and announced it publicly. A shareholder
vote was set for June.
But
one month before the vote, Harbison-Walker sought
to reopen talks with Dresser over responsibility
for asbestos claims under the 1992 spin-off
agreement.
On
May 20, 1998, the chief executive of Harbison-Walker's
parent, Global Industrial Technologies, sent
a letter to Mr. Bradford, Dresser's chief executive,
seeking more money to deal with the asbestos
claims, according to documents filed in a related
court case in Delaware.
In
the letter, Mr. Bradford was told that "Dresser
has been receiving more than it is entitled
to" under the 1992 agreement. The letter warned
that if Dresser and Harbison-Walker could not
negotiate a solution, then Harbison-Walker's
parent would take the dispute to mediation and
arbitration.
When
the letter arrived, Halliburton had just finished
its "due diligence" for the merger, which included
scrutinizing Dresser's operations and the asbestos
issue, according to Halliburton officials and
public documents.
Responding
to questions about the letter, Halliburton's
chief legal officer, Les Coleman, said that
Dresser "did not inform" Halliburton about the
letter until after the merger was completed
in September 1998.
He
added, "We believe Halliburton should have been
informed about the letter."
Mr.
Bradford, who served alongside Mr. Cheney as
Halliburton's chairman after the merger and
left the company in early 2000, referred questions
about whether he had shared the letter with
Mr. Cheney to Halliburton.
The
adequacy of each company's due diligence remains
in dispute. Former oil executives involved in
the merger said that the two companies did not
look that closely at the other's operations
because they felt so comfortable with each other.
Others described the due diligence process as
thorough.
Wendy
Hall, a Halliburton spokeswoman, defended the
company's handling of the asbestos issue.
"The
asbestos litigation environment deteriorated
after 1998 in an extent we did not anticipate,"
she said, so "it's easy to second guess everything
now."
Mary
Matalin, the counselor to the vice president,
said "the merger was widely acclaimed by the
industry and the markets" and "like all major
acquisitions, was subject to enormous due diligence
by highly qualified subject matter experts."
Mr.
Coleman, Halliburton's lawyer, said that Mr.
Cheney was aware that the due diligence review
included asbestos liabilities. Mr. Coleman declined
to discuss the exact nature of that review.
In
1998, Halliburton's asbestos liabilities involved
a few thousand claims, and it inherited 66,000
more with the acquisition of Dresser. Still,
while Mr. Cheney and his board warned shareholders
during the merger of the potential peril from
issues as diverse as political instability in
Algeria and the year 2000 computer-software
problems, asbestos was not cited as a risk.
It was mentioned only in a footnote in Dresser's
annual report that deemed the matter immaterial.
Since
asbestos had bankrupted almost two dozen companies
by 1998, business experts said asbestos should
have been a "red flag issue" for any chief executive.
But they also said it was hard to pass judgment
on the adequacy of Halliburton's due diligence
into the issue without knowing more details.
"There's
plenty of evidence that people - C.E.O.'s and
boards in particular - do not look as closely
into their acquisitions as they should," said
Steven N. Kaplan, a finance professor at the
University of Chicago's Graduate School of Business.
"In
this case," he added, "what you don't know is
how closely they looked at the asbestos risk."
Halliburton's
review of asbestos, business experts said, would
likely have examined how well Dresser had insulated
itself from the problems of its former unit
as well as the past experience of both companies
in settling asbestos claims. In those regards,
the signals were mixed.
On
the one hand, Halliburton and Dresser believed
they had adequate insurance coverage and the
companies had settled previous claims for relatively
small amounts, according to public filings.
But
Global, Harbison-Walker's owner, was a relatively
small, unprofitable company at the end of 1997,
and plaintiffs in asbestos cases had a well-established
record of seeking out "deep pocket" defendants
with even tenuous links to asbestos producers.
The
dispute between Dresser and its former subsidiary's
parent, Global, was first disclosed by Halliburton
in March 1999, in a footnote in its annual report.
The company said it believed that "these new
assertions by Global are without merit."
It
went on to say that overall, its "pending asbestos
claims will be resolved without material effect
on Halliburton's financial position or results
of operations."
The
dispute over which corporate entities would
shoulder the asbestos cost burden continued
until September 2000, in court cases and arbitration
proceedings in three states. Mr. Coleman said
the issues raised in the dispute were largely
resolved in Halliburton's favor.
It
was not until mid-2001 - nearly a year after
Mr. Cheney had stepped down to become George
W. Bush's running mate - that Harbison-Walker,
under new ownership and financial strain, came
back again to Halliburton and "requested financial
assistance to settle its asbestos claims," Mr.
Coleman said.
The
request clearly signaled that Harbison-Walker's
parent was seeking to deflect more of the burden
for the claims to Halliburton.
Halliburton
disclosed the request, which it called an "unexpected
development" on June 28, 2001. Later that year
some large verdicts were rendered in asbestos
cases against Harbison-Walker and Dresser, reflecting
a trend in asbestos litigation generally.
Analysts
say the June request and the later verdicts
were the main reason for the sharp decline in
Halliburton's stock, from $49 in May to around
$10 by the end of the year.
Halliburton
and Harbison-Walker ultimately decided to present
a united front on the asbestos claims rather
than to continue fighting each other. Jonathan
Bonime, Harbison-Walker's general counsel, said
his company and Dresser decided late last year
that "it made sense for Dresser and Harbison-Walker
to cooperate" in dealing with asbestos claims,
in part because they are insured out of a "shared
pot."
Last
February, Harbison-Walker filed for bankruptcy
to protect itself from asbestos claims. The
court provided breathing room for Harbison-Walker
and Halliburton by staying 200,000 claims. Halliburton
agreed to provide up to $195 million in loans
and payments to Harbison-Walker and its parent.
Then
last week, Halliburton, which has $13 billion
in annual revenue, put a cost estimate on its
asbestos liability for the first time: $602
million over the next 15 years. The company
took a charge of $483 million for the second
quarter to account for the remaining current
and future liabilities.
