The Rumor Market

When Dick Cheney announced his departure from the CEO spot at Halliburton to sign on as George W. Bush’s running mate in the summer of 2000, shares of the oil services firm were trading in the low $40s. After a little grumbling, he cashed in most of his stake, netting tens of millions, by mid-September of 2000. Lucky for him! By then HAL was in the low $50s, a level it hasn’t seen since. Today the stock trades closer to $10.

What’s the problem? Most recently it’s been pesky rumors that pending asbestos claims that the firm inherited when it acquired Kellogg Brown & Root and Dresser Industries might force Halliburton into bankruptcy. The most pointed variation of this has it that Halliburton is expecting some huge asbestos judgment to go against it and is already making moves to seek bankruptcy protection, or even that it had already done so. Halliburton strenuously denies all this.

This problem flared up in December, following the disclosure that the company’s Dresser subsidiary was on the wrong end of a $30 million jury verdict in a Baltimore asbestos case. (Halliburton bought Dresser in 1998, on Cheney’s watch.) Dozens of firms, including Owens Corning and W.R. Grace, have been pushed into bankruptcy by snowballing asbestos judgments. At that point, asbestos-related judgments against Halliburton since Oct. 31 totaled $122 million. The firm’s shares were already at $20 or so, considerably below their highs, but this news whacked them by more than 40 percent.

The next week they recovered as the company insisted it was fine, and analysts concluded that the market had “overreacted.” But the rumors returned this month, and shares plummeted to a 15-year low. In a rare move, Halliburton made a special SEC filing explicitly addressing the issue: “There is no basis to a rumor that [Halliburton] has filed for bankruptcy or that such a filing is contemplated.” The “rumor that there had been a new large asbestos jury verdict against it that had not been announced [is] also unfounded,” the statement said. “While [Halliburton’s] policy is that it does not respond to rumors, [the company] has made an exception in this situation because of the serious and spurious nature of these particular rumors.” So there.

How much difference can rumors really make? This is supposed to be what markets are good at: Ferreting out the truth through the collective intelligence of all participants. But sometimes markets take a while to figure these things out, and while unfounded rumors aren’t supposed to be able to affect a stock for very long, they actually can. Despite its denials, and the lack (so far) of either a bankruptcy announcement or another surprisingly large verdict, Halliburton is worth about half what it was when the rumors started flying—a market-cap drop measured in billions.

In this case, obviously, I have no way of knowing how the rumors started, or whether we may learn a few months down the road that they were off on the specifics but correct on the big picture. After all, plenty of the other firms that later filed for bankruptcy protection as a result of asbestos problems had also talked a good game about keeping the issue from threatening their profitability. What Halliburton’s current share price reflects is a measure of the market’s confidence in the company, weighed against the risk that things might get worse.

The company—which next week will give details of what is expected to have a been a profitable fourth quarter—says it will continue to fight its asbestos cases (and appeal the big verdicts that have gone against it lately) rather than seek a make-it-go-away settlement. Its critics are nervous that this strategy won’t work out. Who’s right? That’s exactly what the market is trying to decide.