Questions on Halliburton Deal Under Cheney
By JEFF GERTH and RICHARD W. STEVENSON
The New York Times
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.
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