Did Dick Cheney Sink Halliburton (And Will It Sink Him?)
His record as CEO of the Texas-based oil-field-services giant has been marred by a government investigation into allegations that he fudged the books. His critics say it's another case of corporate malfeasance. But the worst thing the vice president was guilty of was mediocrity.
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For Cheney, Halliburton was an unlikely evolution. He was emphatically not a creature of the private sector. With the exception of one year working for an investment advisory firm in the early seventies, Cheney had been employed in either state or federal government positions since 1965. Though he had been White House chief of staff at age 34 and had run a 2.2 million person, $284 billion-a-year operation at the Pentagon, he had never—unlike his political patrons, the Bushes—met a payroll. But he was in the private sector, and the first thing that changed was the money. It came quickly and in large volumes. Over the next five years Cheney would make an estimated $45 million at Halliburton; he would average more than $2 million a year in salary. He served on the boards of Union Pacific, EDS, and Procter and Gamble, for which he was paid a total of $282,500 in 1999. His wife, Lynne, was writing and selling books, drawing a salary from a conservative think tank in Washington, and sitting on the boards of defense contractor Lockheed-Martin, American Express, Reader's Digest, and Union Pacific Resources Group. For her board-sitting work in 1999, she was paid $305,000. The Cheneys were making more than $600,000 a year from activities unrelated to Dick's lucrative job at Halliburton.
Cheney did not settle in at Halliburton so much as hit the road. In the decade of the nineties, Halliburton's foreign business would expand from 40 percent of its revenues to 70 percent, and though the company was heading in this direction anyway, Cheney accelerated the pace of change. He spent an enormous amount of time traveling overseas, gaining access where Halliburton had never had access before. "I spent five years traveling the globe with the vice president," says Lesar. "If I went to Egypt or Kuwait or Oman alone, I could see the energy minister. But when Cheney and I went to Oman, we would see the sultan. When we went to Kuwait, we would see the emir, and I mean it was not just a courtesy call. It was 'Let's go have tea and go off together.'"
"Halliburton was a neat company that lacked an international reputation," says Fred Mutalibov, an energy analyst with SWS Securities in Dallas. "Cheney changed that. In a lot of places his stature opened the door to the key guys—the ones who run the state oil companies. In countries like Azerbaijan or Kazakhstan, you bring Dick Cheney along and everyone knows him."
As Cheney traveled, the profits at Halliburton rolled in. In less than a year and a half of his tenure, Halliburton's revenues rose 30 percent. The company's stock finally took off, outpacing the S&P 500 in 1997 by 34 percent and its oil-field peers by nearly 40 percent. Some of its projects that year included the $250 million retractable-roof stadium in Houston that became the Astros' new home; a $600 million contract with the state-owned oil and gas company in Algeria for drilling, well services, and a gas-processing plant; and a $120 million, five-year contract with Shell Oil for drilling equipment. The company did business in Iran, Libya, and even a couple of jobs in Iraq, using foreign subsidiaries to circumvent—legally—U.S. laws against business activity in those countries. Cheney pumped up Halliburton's technology with acquisitions of companies such as Landmark Graphics and Numar.
While he personally abstained from lobbying any member of the U.S. government, Cheney believed in grabbing as much government business as he could. According to a study by the Center for Public Integrity in Washington, Cheney's tenure at Halliburton amounted to a Lucullan feast at the federal trough. From 1995 to 2000 Halliburton won $2.3 billion in federal contracts—almost double the total of the previous five years—and another $1.5 billion in taxpayer-insured loans. Stoking the fires were political donations, which increased from $534,750 between 1990 and 1995 to $1,212,000 under Cheney. From 1995 to 1998 the decision to hire Dick Cheney to run Halliburton looked positively brilliant: It was all high tide and green grass.
IN 1998 THAT WOULD CHANGE. That was the year Cheney pulled off his biggest feat—and the thing that has haunted him more than anything else he did at Halliburton: the Dresser merger. It was an acquisition, really, of the second-largest oil-field-services company in Texas by the largest. Dresser was in many of the same general lines of business Halliburton was in, and even owned its own construction and engineering firm, M. W. Kellogg. Its headquarters were a few blocks away from Halliburton's in Dallas. Together the companies formed a $17 billion behemoth with 103,000 employees, the largest oil-field-services company on the planet, larger than their traditional, hated rival Schlumberger. And it was Cheney's deal all the way. "Everybody was talking about Cheney," says William Bradle, the former treasurer of Dresser Industries. "Every conversation was about Cheney this and Cheney that. He charmed Bill [Dresser's chairman, Bill Bradford], and he brought a lot to the party."
The two companies had been circling each other for years, but in 1998 there were reasons to think more seriously about getting together. A massive consolidation was under way in the oil business—driven by such megamergers as Exxon Mobil and Chevron Texaco—which was beginning to drive mergers in the oil-field-services business. Cheney's idea was that Halliburton had to be bigger. He brought up the merger with Bradford while the two were on a quail hunt in South Texas in January 1998. The two men pursued it in a series of secret meetings over the next few weeks at the Crescent Court Hotel in Dallas. In February the companies' boards approved Halliburton's purchase of Dresser with stock; the new company would take Halliburton's name. Though Bradford was given the nominal chairmanship until he retired the following year (he was even allowed to smoke in the executive suite, a habit Cheney and other Halliburton execs didn't like), Halliburton executives were swept into power in most of the company's key positions. It was a striking display of Cheney's clout. "It was the wholesale end of Dresser's top management," says Bradle. "Four out of five heads of its operating divisions did not last more than a year. They were livid. This was not what they understood when the merger was announced."
The merger, second-guessed by Cheney's critics today, made good business sense at the time. "Halliburton was under pressure to merge because its competitors were doing it," says energy analyst Mutalibov. "The idea was to cut costs by eliminating offices and redundant infrastructure, and by consolidation." Indeed, two other megadeals involving Halliburton's competitors were concluded within a few months of the Halliburton-Dresser merger: Schlumberger bought Camco and Baker Hughes International bought Western Atlas. But the timing of the merger turned out to be horrendous: The price of oil came crashing to earth and with it came the oil-field-services business. After making $772 million in 1997, Halliburton lost $15 million in 1998. Stock prices sagged. Though Cheney had explicitly said that layoffs would be minimal and that he and Bradford "don't consider ourselves to be Chainsaw Al,"—referring to Al Dunlap, the former cost-slashing chairman of Sunbeam—Cheney fired more than 10,000 people within a year. Things did not improve quickly: In the second quarter of 1999, profits fell 66 percent.
It was in the third quarter of 1998, when Halliburton was losing $537 million as it tried to digest its giant acquisition, that the company made the accounting change that the SEC is now investigating. According to Halliburton executives, here is what happened: In 1997 and 1998 the ground rules changed for Brown and Root's energy-services business. Instead of cost-reimbursable contracts, in which the client took all the risk of cost overruns, more and more contracts were fixed price, meaning that any added costs had to be negotiated with the client (as would any home-improvement contract). Such claims were, almost by definition, always in dispute. Before 1998, Halliburton's practice was to book no revenue on fixed-price contracts until its clients had approved the claims. But from the third quarter of 1998 onward, Halliburton decided to book revenues it believed that it would collect, even though the client had not yet approved the added costs. "This is a legally acceptable accounting method in the construction business," says Halliburton chairman Lesar, who acknowledges that he and Cheney both knew about it. "At least ten of the top fifteen companies in the business use the same method."
Unfortunately for Halliburton, that is not how it looked to the New York Times, whose May 22, 2002, story on the subject single-handedly launched the SEC's investigation. The story was based in part on interviews with two former Dresser executives who, according to the Times, "said they concluded after the merger that Halliburton had instituted aggressive accounting practices to obscure its losses." Specifically, the story cited $89 million in additional 1998 revenues that the accounting change had generated and pointed out that Halliburton had not acknowledged this change in its annual report to the SEC until early 2000, more than a year later. The Times' story seemed to make sense: Halliburton was experiencing its first losses in many quarters and was desperate to add revenue.
But the Times got a couple of crucial facts wrong. The first was that what is known in the accounting business as "'accruals on unapproved claims' is indeed common in the construction business," as noted by the Wall Street Journal in a follow-up story that more or less dismissed the Times' piece. The second was the suggestion that, had Halliburton not booked the $89 million, it would have had to write the amount off its bottom line, creating a more than $100 million loss for the year. This was simply not true: Accounting for such receivables does not work that way. No additional loss would have resulted. In any case, $89 million out of $17 billion-plus in revenue is an amount so small as to be nearly invisible. Lesar points out that in 1998 the company took a $1 billion charge for costs related to the merger. "The reality is the $89 million was not believed to be significant," he says. "If you're trying to smooth out revenues, you sure as hell wouldn't do it in a quarter when you are taking a billion-dollar hit on something else." Michael Granof, an accounting professor at University of Texas' McCombs School of Business says of the change: "Is the accounting method used legitimate? The answer is yes. Is it blatant fraud like WorldCom? No. Is it aggressive? Probably. Should they have disclosed this the year it happened? The general answer is yes, even though the amounts are very small."
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