Halliburton may sell KBR to end public relations nightmare
24 Sept. 2004
WASHINGTON, Sept. 24 (HalliburtonWatch.org) -- Halliburton may sell its KBR subsidiary to stop the torrent of criticism over the company's work in Iraq, executives announced yesterday. A sale of KBR would mean Halliburton would no longer be the Army's chief contractor in the Middle East. The move could help end what the New York Times called a "public relations nightmare" for Halliburton over its bungling of military contracts and questionable ties to U.S. Vice President Dick Cheney. ###
Meanwhile, the Pentagon recommended the termination of KBR's most lucrative contract, known as LOGCAP, so that other firms can be hired to perform troop-supply work in the Middle East. Under the Army's LOGCAP contract, KBR supports the troops with everything from food to laundry to transportation of supplies throughout Iraq.
As an alternative to selling the entire company, Halliburton may spin-off KBR and/or do a restructuring of the firm, a move executives say could save between $80 million to $100 million per year. But no final decision has been made on whether to sell the entire company or restructure its operations. Wall Street analysts and bankers have complained that KBR's Iraq contracts are mired in low margins. For example, under LOGCAP, KBR is paid a fee by the Pentagon of only two percent of the company's expenses.
Halliburton's decision to radically change or sell KBR is probably related less to a public relations nightmare with the Pentagon than to asbestos-related problems caused by Cheney during his tenure as CEO. While CEO, Cheney caused Halliburton's KBR subsidiary to incur $4 billion in legal claims filed by people who were injured by asbestos.
The asbestos nightmare started in 1998 when Cheney orchestrated the $7.7 billion merger of Halliburton with Dresser Industries, a move the New York Times glowingly described as "the future vice-presidential candidate's big coup." But the "big coup" had big problems. The merger encumbered KBR with over 370,000 asbestos claims worth billions of dollars. It saddled Halliburton in red ink after Cheney left the company to run for vice president.
Most of the asbestos claims were filed against Dresser's M.W. Kellogg subsidiary in the years prior to the merger with Halliburton. Under Cheney's direction, M.W. Kellogg merged with Halliburton's Brown & Root to form "Kellogg Brown & Root" (also known as "KBR"). The inherited asbestos liabilities forced Kellogg Brown & Root to file a prepackaged Chapter 11 bankruptcy claim in 2003, though its government contracts were not part of the bankruptcy. So, while Halliburton has enjoyed skyrocketing revenues from the wars in the Middle East, it has not earned a profit for 2002 and 2003 -- mostly because of the billions in charges related to KBR's asbestos liabilities and bankruptcies. And 2004 is shaping up as another year of losses. The sale or restructuring of KBR could help Halliburton emerge from the Cheney-created asbestos problem.
M.W. Kellogg manufactured and marketed asbestos used in insulating homes and buildings, but the substance was later banned after it was found to cause cancer and other health problems. Victims allege the company knew of the health risks of asbestos long before taking it off the market and sued for medical expenses. Halliburton/KBR and thousands of victims reached a tentative $4 billion settlement earlier this year, but no action on finalizing the settlement is expected until year's end. And Congress may pass legislation to establish a national asbestos fund that would give Halliburton a sweeter deal than the pending settlement.
Cheney's role in this disaster is rarely discussed in the media where his five years with Halliburton is often touted as one of his qualifications for vice president. A New York Times editorial said, "Mr. Cheney's ability to fish and shoot his way to serious money should be an inspiration to all careerists...."
But some critics have questioned Cheney's business judgment, arguing that no competent CEO would have merged Halliburton with a company suffering from billions of dollars in asbestos liabilities. They point out that Cheney, who had no prior business experience before joining Halliburton, was hired only because of his impeccable government contacts developed while working as a congressman and secretary of defense.
"Clearly Dick gave Halliburton some advantages," Halliburton vice-president, Bob Peebler, told the Chicago Tribune in 2000. "Doors would open," he said.
The gamble paid off (if temporarily): Under Cheney's tenure as CEO, Halliburton's revenue from federal government contracts nearly doubled. Government-backed loans from the Export-Import bank increased over one thousand percent. The company became the 18th-largest defense contractor, in terms of revenue, whereas before Cheney's arrival the company was the 73rd largest contractor.
While government doors opened for Halliburton because of Cheney, his lack of business experience caused a deep financial hole that Halliburton is still attempting to climb out of today. It proves that Cheney's rolodex of important Washington insiders who delivered billions in revenue to Halliburton is no match for a competent CEO with real business experience.