What Cheney Did at Halliburton

An in-depth look at his tenure there finds a decidedly mixed record. One major blunder: Acquiring an asbestos albatross with Dresser

By Mike France and Stephanie Anderson Forest

Halliburton (HAL ) has the misfortune of being one of those rare companies that becomes a Presidential campaign issue. Citing a wide array of alleged misdeeds -- including accounting fraud, bribery, bilking the government, tax evasion, and trading with rogue nations -- Democrats are suggesting that Vice-President Dick Cheney, who was chief executive of the Houston-based oil-services and construction giant from 1995 to 2000, is unsuited to be reelected Vice-President and, more broadly, that Republicans are indifferent to corporate misbehavior.

Republicans, unsurprisingly, dismiss the Halliburton-bashing as mere demagoguery. "The reason they keep mentioning Halliburton is because they're trying to throw up a smokescreen," Cheney declared during the Oct. 5 Vice-Presidential debate. "They know the charges are false."

The back-and-forth has confused voters and done little to clarify the relevant issues: What kind of a company is Halliburton? How much did Cheney know about the alleged legal and ethical abuses during his tenure? And how did he do as a CEO, anyway? Would the board have booted him if he had remained in his job? The campaign has turned these from dead historical questions into partisan political issues deserving of closer scrutiny (for a look at the criticisms of the Democrats' Veep candidate, see "Not Much Dirt on Counselor Edwards").

STICKY PROBLEMS.

  With multiple investigations still under way, a continuous stream of new information about Halliburton's past keeps flowing -- but it's still impossible to provide conclusive answers to these questions. At this point, though, nothing suggests that the company deserves to be mentioned in the same breath as the present-day icons of corporate malfeasance. Closer analogies would probably be to Boeing (BA ) or Merrill Lynch (MER ) -- both of which, like Halliburton, have found their way into a wide range of sticky problems, across diverse business units, over a long period of time.

Although a virtual army of government investigators, plaintiffs' lawyers, and opposition researchers have pored over Halliburton, no evidence has ever emerged indicating that Cheney knew about any of its travails. For example: He says he wasn't told about an accounting change in 1998 that boosted pretax income by 46% -- a move that wasn't disclosed to shareholders and led to Securities & Exchange Commission sanctions earlier this year.

But his story has withstood close examination. Scott + Scott, a Colchester (Conn.) plaintiffs' law firm that's suing Halliburton over the incident, hired a private investigator who interviewed dozens of former employees. "We did not find anything about Dick Cheney," says partner David R. Scott.

A "C" GRADE.

  Still, simply put, Cheney was no ordinary CEO. He parachuted into Halliburton in October, 1995, with no energy industry background and spent much of his time using his political contacts to bring in new business. International billings during his reign soared from 51% of total revenues to about 70%. Halliburton also expanded the profitable liquefied natural gas business and rewarded shareholders with a five-year total return of nearly 190% -- compared with about 132% for the Standard & Poor's 500 Energy Sector Index.

He also left Halliburton with an enormous (and probably foreseeable) asbestos liability picked up from the 1998 acquisition of Dresser Industries that caused Halliburton's share price to sink after his departure. All in all, "it is very difficult to see him getting any better than a C" for his overall performance, says Dan Pickering, head of the Houston-based institutional research firm Pickering Partners, who has followed the company since before Cheney arrived. "If asbestos had not become such an issue, it would be a B."

Analysts may quibble about the grade, but nobody can argue about one thing: Cheney had more impact on Halliburton than anybody since founder Erle P. Halliburton. Shortly after arriving, he embarked on a shopping spree, picking up seismological software manufacturer Landmark Graphics in 1996, oil-drilling technology producer Numar the next year, and longtime oil-field services rival Dresser the year after that. Revenues rose from $5.7 billion in 1995 to $14.5 billion in 1998.

In just over three years, Cheney transformed a sleepy company that was falling behind peers such as Schlumberger and Baker Hughes into a dynamic industry pacesetter. "There's no question that he raised our profile," says current CEO David J. Lesar.

TRIUMPH AND RETREAT.

  As a CEO, the former Defense Secretary was a classic Mr. Outside. While he traveled to world capitals, Lesar, then chief operating officer, handled day-to-day details. But Cheney was no mere glad-hander. He quarterbacked the big deals. When the opportunity to buy Landmark arose, he swiftly snapped up the hot property, hammering out a deal with its CEO, Robert P. Peebler, within four hours. "I was surprised at how engaged he was and how fast he put the pieces together," says Peebler, who stayed on at Halliburton until 2001.

Where the first half of Cheney's tenure was a triumphant march, the second half was a forced retreat. From January, 1997, to December, 1998, the price of oil dropped from $26 to $12, causing demand for oil-field services to plummet. Revenues fell, and Halliburton laid off about 8% of its 107,000 employees. It was still struggling when George W. Bush called Cheney in April, 2000, to lead the Vice-Presidential search committee. Cheney seized the chance -- and wound up taking the job himself.

Three claims of serious illegal conduct emerged from the five-year period that Cheney ran Halliburton. The first involves the failure to disclose the 1998 accounting change. The second concerns accusations that Brown & Root, a subsidiary of Halliburton since renamed Kellogg Brown & Root, overbilled Washington from 1995 through 1997 for repair work done at Fort Ord in California. Halliburton settled these charges for $2 million in 2002 without admitting guilt. "Kellogg Brown & Root settled the lawsuit in order to resolve this matter and to avoid further litigation," a Halliburton spokeswoman says. The third involves claims that Halliburton belonged to a four-company consortium that bribed Nigerian officials to get big energy facility contracts. These charges are under investigation by the SEC, Justice Dept., and French authorities. Halliburton says it's conducting its own investigation.

COMMON STRATEGY.

  The Fort Ord episode started before Cheney took over and didn't involve much money. The Nigerian involvement was inherited with the Dresser deal. Consortium member and ex-Dresser unit M.W. Kellogg allegedly began the bribes before the merger and continued them afterwards. So Cheney can only be held responsible, at most, for failing to discover and clean up these two alleged misdeeds.

Many of the other accusations that have been lobbed at Halliburton don't involve illegal conduct. Democrats have bashed it for reducing taxes by setting up subsidiaries in the Cayman Islands, but this is a common strategy among multinationals. The Dems have also attacked it for doing business with Libya, Iran, and Iraq, but this is generally permissible as long as it's done by foreigners working for non-U.S. subsidiaries.

It's not so much a question of whether Halliburton acted improperly, but whether its actions were out of line with Cheney's political rhetoric. In truth, he has been a longtime critic of unilateral sanctions and hasn't really been an America-Firster, bashing Corporate America for offshore tax evasion. By Mike France and Stephanie Anderson Forest

IMPOSSIBLE TO FORESEE?

  The one charge Cheney can't contest is that he failed to pay enough attention to the details. Even if he didn't know about the big 1998 accounting change, there's no doubt that he should have.

And then there's his asbestos blunder. Cheney acquired tens of thousands of claims from Dresser along with the merger. This liability monster has depressed Halliburton's stock price for more than three years, driven several subsidiaries into bankruptcy, and could wind up costing more than $4 billion to resolve. Halliburton is now trying to set up a trust fund to cover future claims.

For years, Cheney and his defenders have deflected responsibility for this debacle by arguing that the Dresser disaster was impossible to foresee. This claim has some superficial plausibility. After all, asbestos litigation has certainly exploded in recent years to engulf all kinds of companies that never made the cancer-causing fiber or sold products that contained it. "I don't think anyone in the industry could have anticipated or what-iffed this series of events in the due diligence process," says Lesar.

NO SURPRISE.

  "Ambushed by asbestos" is a familiar story in Corporate America -- but this isn't Halliburton's story. Most of the asbestos liability stems from a one-time Dresser subsidiary known as Harbison-Walker Refractories, which used the material to make heat-insulating bricks. It was an early-generation defendant. By the end of 1997, a few months before the Halliburton merger was announced, Dresser already had 66,000 pending asbestos claims, according to securities filings.

These were not all minor nuisance cases. In 1991, Harbison lost a $2 million jury verdict in Miami (which it ultimately settled for less). In fact, one of the key courtroom losses that caused Halliburton's stock to plummet in late 2001 -- an Orange (Tex.) case involving more than 105 plaintiffs that led to more than $100 million in damages -- was filed in 1994.

So unlike, say, Ford Motor (F ), E&J Gallo Winery, or Goodyear (GT ), Halliburton cannot claim that its asbestos exposure was a big surprise. One of the main factors that made it willing to accept the risk was the fact that Harbison -- which had been spun off in 1992 -- had publicly agreed to indemnify Dresser for all post-spin-off claims.

But there was good reason to question whether Harbison could hold up its end of the bargain. By 1997 asbestos had already driven more than 30 companies -- including many that made products like Harbison's -- into bankruptcy. Insolvency had essentially voided their indemnification obligations and forced asbestos victims to find deep pockets elsewhere, something that should have been a troubling omen to Cheney & Co.

"THIS TRAIN WAS ROLLING."

  One other big red flag was flying: In June, 1997, the Supreme Court delivered an enormous blow to asbestos defendants in the case Amchem Products Inc. v. Windsor. The ruling held that companies could not settle future claims from people whose medical problems still had not materialized by setting aside trust funds in advance -- and thereby made it impossible to place a ceiling on long-term liability.

Most legal historians now consider the Amchem decision to be the spark plug that reignited asbestos litigation and triggered the massive wave of cases that continues to this day. By the time Halliburton acquired Dresser, "there were attorneys on both the plaintiffs' and defense sides who could have told you that this train was rolling and that if you were anywhere near the tracks, it was going to run over you," says Stanford Law School professor Deborah R. Hensler, who has been writing about asbestos litigation for nearly two decades.

Of course, hindsight is 20-20. Nobody in 1998 predicted that the reverberations from Amchem could possibly be so powerful. And Dresser was certainly not the last questionable asbestos acquisition anybody ever made. But it was one of them -- and it seems fair to hold Cheney and his advisers, who have acknowledged that they were briefed on the risks, accountable for a bad gamble.

MAGNET FOR CONTROVERSY.

  Next to the asbestos fiasco, Cheney's legacy is mixed. The Dresser acquisition did strengthen Halliburton's energy franchise by bolstering its position in liquefied natural gas, drill-bit manufacturing, and directional drilling. Along with the other deals, it helped turn the company from a "heavy-iron" manufacturer into a more dynamic high-tech service provider. "Landmark and Numar were very solid transactions," says analyst Pickering.

Cheney's other major move was bolstering Halliburton's engineering and construction business. He did this, in large part, by merging Dresser's M.W. Kellogg subsidiary with Halliburton's own Brown & Root.

The resulting combination, now known as Kellogg Brown & Root, has turned into a magnet for controversy. A $2.5 billion energy project off the coast of Brazil has racked up losses of $762 million over the past three years. And KBR has been at the center of recent allegations of misdeeds surrounding its contracts in Iraq. In September, Halliburton CEO Lesar announced that he's considering selling or spinning off KBR -- a move that would effectively renounce one of his predecessor's key decisions.

"AN AVERAGE JOB."

  To be fair, the controversy that has surrounded KBR probably wouldn't be as hot if Cheney weren't Vice-President. But it'S also true that had Cheney never left Halliburton, he still would have been under the gun. "Overall, Cheney did maybe at best an average job," says Jason E. Putman, an energy analyst at Victory Capital Management, which holds some 2.3 million shares of Halliburton.

Cheney's tenure is nothing to brag about. That much is certain. But it's also true that he's not the corporate villain his political opponents would have him be.

France is Legal Affairs editor for BusinessWeek in New York. Forest is a correspondent in BusinessWeek's Dallas bureau

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