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Allan Sloan

Halliburton Pays Dearly but Finally Escapes Cheney's Asbestos Mess

By Allan Sloan
Tuesday, January 11, 2005; Page E03

It's time for yet another Halliburton story -- but not the one you may be expecting. This isn't about the endlessly scrutinized Iraq contracting business of the big energy services company that Dick Cheney ran before he became vice president. And it's not about Halliburton's profit-boosting accounting change during Cheney's regime, or the scandals and problems currently affecting some of the firm's far-flung projects.

Instead, let's talk about Halliburton's well-executed $5 billion escape from its asbestos problems, most of which Cheney created when he orchestrated Halliburton's purchase of Dresser Industries in 1998. Few people connect this problem with Cheney, but they should, given that he was in charge at the time and got a raise as a result of buying Dresser.

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Dresser's asbestos problem was only a potential one when Halliburton bought it, but rapidly metastasized into a threat to Halliburton's existence. By then, though, Cheney had gone off to Washington.

Had he still been Halliburton's chief executive, Wall Street might have forced him to take responsibility for the asbestos problem he imported to his company. But because he wasn't around -- and because his successor, Dave Lesar, was a stand-up guy -- Cheney has largely escaped scrutiny for this fiasco.

Now that Halliburton has managed to extract itself from its asbestos liability by paying a ton of cash and stock to trusts that will compensate victims and their lawyers, we can get a handle on how much Dresser's piece of the problem cost Halliburton. It turns out to be almost as much as Halliburton paid for the company.

While Halliburton's all-stock takeover of Dresser was valued at $7.7 billion when it was announced in February 1998, it was worth only $5.3 billion when it was completed seven months later. The bankruptcy settlement is costing Halliburton just about that much: around $2.8 billion in cash, Halliburton stock with a market value of $2.3 billion the day before Dresser's bankruptcy was resolved and miscellaneous odds and ends and potential payments.

The bankruptcy resolution, which became final on Jan. 3, covered both the Dresser problems and the smaller asbestos problems that Halliburton already had.

Halliburton hasn't said how much each set of liabilities cost, but Dresser is clearly way more than half. How do I know that? Because a Halliburton bankruptcy filing discloses that "historical Dresser" accounts for about two-thirds of the claims, and the filing also shows that claims from Dresser's business average from 2.5 to five times as much as equivalent claims from Halliburton's businesses.

Do the math, and at least five-sixths -- 83 percent -- of the claims costs are from Dresser. So let's attribute 85 percent of the costs to Dresser. That seems reasonable, if not conservative.

That works out to around $4.3 billion. That doesn't include what Dresser-related claims cost Halliburton between the purchase in 1998 and the Chapter 11 filing in 2002 by Dresser and other Halliburton subsidiaries. It doesn't include offsets for possible insurance payments, either, but I don't know how to value those.

I give Halliburton's current management huge credit for pulling off this tricky maneuver. And I give them big credit for dealing with the problem rather than awaiting a miracle rescue from Congress. Almost from the day it took office, the Bush administration has pushed hard to get Congress to limit asbestos liability. That includes President Bush's visit to Illinois last week to push his "reform" proposals.

Halliburton, whose fortunes are tied to the oil industry, has profited from the surge in oil prices. Even though its stock has quadrupled from its asbestos-woe low, it's still below what it was when Cheney left in the summer of 2000. Imagine what Halliburton shares would fetch today had the Dresser problems never happened. Much more than it currently sells for, I'm sure.

A Cheney spokesman said the vice president wouldn't comment about Halliburton, and referred all queries to the company.

Halliburton, which is understandably eager to put the whole asbestos mess behind it, wouldn't discuss Cheney's role or how much Dresser's asbestos problems have cost it. "We are certainly glad to close the asbestos chapter in Halliburton's history," said company spokesman Wendy Hall. "We are focused on moving forward in 2005, not backwards."

Even if it had been a non-celebrity CEO who messed up big-time with Dresser, this would still be a tale worth telling. That's because this deal shows that when you analyze a transaction, you have to look long-term as well as short-term.

As Cheney's Dresser misadventure shows, today's triumphant deal champ can be tomorrow's chump.

Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.


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