The Asbestos Monster: How Scary for Halliburton?

Damages may be a greater threat than the company realizes

Back in 1998, when he was CEO of oil-services giant Halliburton Co. (HAL ), Vice-President Dick Cheney bought smaller rival Dresser Industries Inc. On Dec. 7, the deal exploded on his former company. When a little-known former Dresser subsidiary suffered defeat in a key asbestos litigation case, worried investors sent shares plunging 42%, to $12.

Halliburton was already well off its 52-week high of $45 because of falling energy prices. Now investors are scared the company is about to get eaten by the asbestos monster--the same one that bankrupted Johns Manville and Owens Corning. With their coffers empty, asbestos lawyers are now going after other companies such as Halliburton, Viacom (VIA ), and Pfizer (PFE ). Although none of them produced the flame retardant, all sold products containing it or bought companies with asbestos exposure.

Current CEO David J. Lesar allayed fears somewhat. He vowed to appeal the rulings, announced that Halliburton has more than $2 billion in liability insurance, and laid out his litigation strategy for analysts. But his chances of reducing the awards may be tougher than investors realize.

Halliburton is laying the blame for its woes on a predictable target: the runaway jury. The company says that from 1976 until this year, it settled 194,000 claims for an average of about $200 apiece after insurers chipped in their share. Then, this fall former Dresser unit Harbison-Walker, which marketed a variety of products containing asbestos, suffered four big losses in a row whose awards totalled $152 million.

FEWER DEFENDANTS. These cases, for complex reasons, were not originally handled by Halliburton's litigation team. As a result, Lesar argues, they're anomalies. Over the long run, he says, the cost of the company's lawsuits will return to its long-term average. "There has been a huge overreaction to these events," explains the embattled chief.

Problem is, that's not the way asbestos litigation works. Pointing to earlier damage awards is all but useless because the liability keeps expanding. As more companies go bankrupt, the number of defendants left to make payments decreases. And under legal rules that are more concerned with compensating victims than protecting shareholders, a company with partial responsibility for a person's injuries can be held responsible for all of the damages. "Halliburton has been able to go under the radar without making big payments because we were focused on the other defendants," says Karl E. Novak, an attorney in Mount Pleasant, S.C., who brought one of the Texas cases. "Now that some of those other companies are bankrupt, people are starting to look more closely at Halliburton."

ACE CARD? That's not the only reason attorneys will be looking at Halliburton in a different light. Trials are like focus groups: Opposing lawyers get to tell their stories and see which one jurors like better. Now that plaintiffs' attorneys have been successful at trial, others bringing suit won't accept cheap settlements.

Halliburton does have a potential escape hatch. The idea of limiting asbestos liability has been kicking around in Congress for years. And the company has contributed more than $100,000 to legislators who supported the notion. Cheney even kicked in $13,500 when he was a corporate officer. Now that he is in power, many analysts hope the company will benefit from favorable legislation.

But for now, congressional relief seems distant. Lawmakers have higher priorities next year. And of course, if Cheney were to participate, it could prove to be a huge public relations obstacle.

Does this mean Halliburton will be driven into bankruptcy? Not at all. Plenty of companies have been managing big asbestos dockets for years. But if history is any guide, the company has a rough--and costly--road ahead.

By Michael France in New York and Stephanie Anderson Forest in Dallas, with Laura Cohn in Washington and Michael Arndt in Chicago

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