How Asbestos Burned ABB

When ABB Ltd. (ABB ) acquired Combustion Engineering Inc. in late 1989, executives of the Swiss industrial powerhouse raised some eyebrows for paying what many believed was too lofty a price. Now, a dozen years later, it's clear that the $1.6 billion in cash that ABB forked out was a mere downpayment.

By buying Combustion Engineering, based in Stamford, Conn., ABB captured a big chunk of the business of designing and building power-generation facilities in the U.S., which is why then-CEO Percy Barnevik said the deal was worth top dollar. However, ABB also picked up Combustion Engineering's liabilities for exposing Americans to asbestos. On Jan. 30, ABB reported that it had to set aside an additional $470 million to cover future asbestos claims, raising its total reserves to $940 million and helping to drag the company into the red in 2001. Deutsche Bank estimates that ABB will have to set aside at least $1 billion more. The asbestos debacle is one more reason why ABB shareholders are attacking Barnevik's legacy.

Odd as it may seem today, when just the rumor of asbestos liability can torpedo a company's stock, the subject of asbestos never even came up when ABB announced its takeover. One reason was that Combustion Engineering had stopped using the fireproof mineral in power-plant insulation by the early 1970s, once its cancer linkage had been conclusively proven. In addition, corporate defendants seemed to have liabilities under control, thanks to insurance and an industry coalition set up to handle all the litigation.

But after an industrywide class-action settlement was rejected by the U.S. Supreme Court in 1997, liability claims began to surge anew. And the filings have spiked even higher over the past two years as other defendants have filed Chapter 11 bankruptcy to win protection against the flood of claims.

ABB says Combustion Engineering was named in 55,000 new claims in 2001, up 41% from 39,000 in 2000. That lifted the number of pending claims against the company to 94,000. ABB says that it is now paying an average of more than $6,000 to settle each claim.

If it's any comfort, ABB isn't the only company that has been knocked breathless by asbestos liabilities acquired through a takeover. Oilfield-services giant Halliburton Co. (HAL ) faces more than 200,000 claims because of its purchase of Dresser Industries Inc. Indeed, after seeing what has happened to Halliburton and others, Danaher Corp. on Feb. 13 called off its bid to acquire liability-burdened Cooper Industries Inc. If only ABB could have had that foresight.

By Michael Arndt in Chicago

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