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Case Study: Federal Mogul

Asbestos: Think Again: Case Study: Federal Mogul

March 4, 2004

Wheeling & Dealing in Asbestos Liability

"We believe today we have a sound operational business plan, a clear and exciting strategy, and the elements of a restructuring plan that will allow us to emerge from Chapter 11 as a financially strong company with a solid future."

— Federal-Mogul CEO speaking at Annual Shareholders Meeting, 5/15/02. See: http://www.federal-mogul.com/cda/content/
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The Federal-Mogul company presents a tortuous case study of a corporation that knowingly became enmeshed in asbestos liability as a business acquisition strategy; entered into the development of a traditional asbestos reorganization plan to deal with asbestos claims; aggressively sought a bail-out from Congress to reduce those liabilities in lieu of a reorganization plan; and finally, and forcefully, rejected the Frist-Hatch bill (S. 2290) as unfairly costly to the company.

Federal-Mogul is a multinational auto-parts conglomerate serving auto manufacturers and the aftermarket. Its world headquarters are in Southfield, Michigan. Federal-Mogul employs over 45,000 people worldwide, and its better-known product lines include Champion spark plugs, Wagner lighting systems and brake pads, and ANCO wiper blades. Federal-Mogul reports 2004 revenues of over $5.5 Billion. (See company website: http://www.federal-mogul.com/cda/content/
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)

Federal-Mogul has spent the past few years attempting to clear its acquired asbestos liabilities, first through lobbying Congress for a bailout, and when that failed, through filing for Chapter 11 bankruptcy protection. Now that it is close to emerging from Chapter 11 bankruptcy (possibly later this year, according to the company), Federal-Mogul is lobbying hard against the same Congressional bailout it once fought "vigorously" to win. On April 26, 2004, Federal-Mogul sent a strongly-worded letter to Senator Orrin Hatch, sponsor of the bailout bill currently being debated in the U.S. Senate. In the letter, the company laid out its current position:

"Enactment of S. 2290 as introduced would be devastating to Federal-Mogul and its future viability. The Senate must work to reduce — not increase — Federal-Mogul's contribution levels. Failure to adjust Federal-Mogul's contributions to the national trust fund to a sustainable level may result in the loss to the trust of more than $2.2 billion in Company payments, as even Congress may be unable to extract blood from a stone."

— Federal-Mogul letter to Senator Hatch, April 26, 2004 [View Document]


History of Federal-Mogul's Asbestos Involvement

Federal-Mogul had very limited involvement with asbestos prior to its acquisition of several companies with significant asbestos liabilities in the late 1990s. Those acquisitions, which catapulted the company onto the Fortune 500 list for the first time in 1998 (ranked #349), gave the company a much stronger foothold within its industry. However, along with that added market strength and rapid growth came huge asbestos liabilities acquired during the purchase of companies which had made asbestos products and been sued by customers and others.

The company explains the history of its acquired asbestos liabilities on its website:

"There are essentially seven different streams of asbestos liability affecting Federal-Mogul, each arising from a Federal-Mogul acquisition of a discrete company with its own unique role in the manufacture, distribution and sale of asbestos-containing materials."

(See: http://www.federal-mogul.com/cda/content/
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)

The largest source of asbestos liability resulted from Federal-Mogul's acquisition of British automotive supplier T&N Plc, which formerly manufactured auto parts containing asbestos. However, Federal-Mogul also acquired several other companies within the same time frame that had significant asbestos liabilities. Given their scale and number, it is difficult to believe these acquisitions were anything other than strategic business decisions.

Federal-Mogul acknowledges today on its website that, prior to those acquisitions, the company was fully aware of the asbestos liabilities involved, yet proceeded with the acquisitions with the confidence that it could handle the consequences.

The company website explains:

23. What caused the asbestos liability?

Federal-Mogul inherited most of its asbestos liability through its acquisition of T&N plc, a U.K. company, and its subsidiaries in March 1998. T&N, formerly known as Turner & Newall, was among other things, an English building materials manufacturer that used and sold asbestos products. When Federal-Mogul acquired T&N, it no longer manufactured these materials but was a recognized manufacturer of automotive products headquartered in Manchester, England.

24. Did you know about the asbestos liability at the time of the acquisition?

Yes. The company set up a reserve in March 1998 for approximately $2.1 billion (including insurance) to handle the estimated asbestos liability post acquisition. This anticipated asbestos liability was based on work done to put in place an asbestos insurance policy in late 1996.

(See: http://www.federal-mogul.com/cda/content/
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)

An article from The Scotsman prior to Federal-Mogul's acquisition of T&N also mentions Federal-Mogul's confidence about assuming asbestos liabilities:

"Sir Colonel Hope, T&N's chairman, stressed that Federal Mogul had offered a major divestment programme involving assets of more than � 100 million. He predicted that the deal would go through next month.

The key factor behind the switch in trading returns was the company's decision to ring-fence itself from further problems from its days as an asbestos producer by making � 1.2 billion provisions and insurance arrangements in 1996.

The move was seen by many as an invitation for a well-resourced company to step in with a takeover bid and Sir Colin stressed that Federal Mogul was in a position to meet all liabilities."

(The Scotsman, "Engineer roars back into black," Feb. 19, 1998)

After the flurry of acquisitions was complete, Federal-Mogul began lobbying Congress "vigorously" for a legislative solution to its asbestos "issues." Frank Macher, former CEO and Chairman of the Board of Federal-Mogul, explained the strategy in a Federal-Mogul Annual Shareholders Meeting:

"Along with this new litigation approach, we took a leadership role in seeking a legislative solution, co-chairing a group of 30 other Fortune 500 companies with asbestos issues creating an active alliance. Working together, we sought sponsorship and support of legislation that provided for medical criteria, venue criteria, and limited the consolidation of cases.

We also intensified the senior management team's involvement with the asbestos issue. We established an Asbestos Strategy Review Board, comprised of many of our executives and chaired by me. The handling of our asbestos issues was a high priority and we focused many, many hours on both our litigation strategy and our legislative efforts.

Jim Zamoyski and I traveled regularly to Washington, D.C. seeking legislative support from U.S. Senators and members of Congress. We launched an aggressive letter-writing campaign that energized our U.S. employees, suppliers and customers for the legislative cause. I thank all shareholders who participated in the letter writing campaign.

Just as it seemed that we had the momentum and support going our way, changes in the U.S. Senate leadership dramatically halted our progress. In fact, NAM, the National Association of Manufacturers, took over the leadership of this coalition last summer and they are still working to have a bill introduced."

(Frank Macher 5/15/02. See: http://www.federal-mogul.com/cda/content/
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)

When their lobbying efforts failed, Federal-Mogul filed for Chapter 11 protection on October 1, 2001 to shield their business from further litigation. Mr. Macher explained:

"The decision to file was extremely difficult. But we could not allow the enterprise value of Federal-Mogul to be drained any further. On October 1st, we acted to separate our asbestos liabilities from the company's true operating potential by voluntarily filing for financial restructuring in Bankruptcy Court in the United States and Administration in the United Kingdom."

(Frank Macher 5/15/02. See: http://www.federal-mogul.com/cda/content/
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)

Some stock analysts and financial reporters stated that Federal Mogul was driven to bankruptcy not primarily by its asbestos liabilities, but by its overzealous acquisition strategy years prior under previous leadership. Federal-Mogul announced 13 acquisitions in 1998 alone.

"Some analysts had seen Federal-Mogul as a candidate for bankruptcy court as the company struggled under a mountain of debt acquired during a $6-billion buying spree in 1998."

(Detroit Free Press, "Credit Gives Big Supplier A Life Federal-Mogul Says Added $550 Million Assures Its Survival," Jan. 4, 2001)


"Asbestos-related claims are only one of the many problems Federal-Mogul faces, however. Even without the asbestos situations, the company's core business units have been faltering.

After a long string of acquisitions in the late 1990's, F-M top management was widely criticized for failing to integrate the businesses and capitalize on the potential synergies. In the ultra-competitive automotive OEM and aftermarket business arenas, competitors quickly learned to capitalize on Federal-Mogul's weaknesses."

(eBearing News, "Federal-Mogul Files Chapter 11 Bankruptcy," Oct. 2, 2001. See: http://www.eBearing.com/news2001/news341.htm)


"The company blames a soft market for spare parts, but rivals do not seem affected and US car sales are booming. It is more likely that Federal-Mogul is having trouble integrating its hasty purchases. The merger machine is starting to look like a takeover target."

(Financial Times, "Federal-Mogul," September 16, 1999)

Federal-Mogul's creditors reportedly have felt the company was so sure it could get Congress to solve its asbestos problems that it has balked on its Chapter 11 commitments:

"According to creditors interviewed by eBearing, their frustration with Federal-Mogul has been mounting; the company has asked for and received three extensions to the exclusivity period filing deadline. Yet the creditors told eBearing F-M was not working on a reorganization plan but instead hoped to solve its problems by lobbying Congress to restrict asbestos-related claims."

(eBearing News, "Federal Mogul Reaches Reorganization Agreement with Creditors," 2/3/03. See:http://www.eBearing.com/news2003/020301.htm)

As is the case with most firms that have gone through the special form of bankruptcy approved for asbestos liabilities, Federal-Mogul describes its Chapter 11 filing not as a prelude to lay-offs, pension fund reductions or other "going out of business" actions the term "bankruptcy" often invokes, but as a means to make the company "stronger" and "more competitive" than before, and discusses the company's commitment to growth, even while in bankruptcy:

"Our financial restructuring proceedings will permit us to continue to serve our customers while we develop a plan of reorganization that will resolve the company's asbestos liability and create a capital structure that will provide sufficient cash to fund operations and fuel new growth initiatives. This action provides a means for effectively separating our company's acquired asbestos liabilities from our true operating potential, thus paving the way for Federal-Mogul to emerge from the reorganization process as a stronger, more competitive enterprise.

5. Is Federal-Mogul going out of business?

Absolutely not. We are addressing the company's asbestos liability through the financial restructuring proceedings to preserve and strengthen our business, so that we can compete successfully in the future.

Federal-Mogul will continue to serve customers, renew current contracts, secure new business and invest in new business expansions to support our customers."

(See: http://www.federal-mogul.com/cda/content/
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)

Frank Macher has made numerous, confident statements to the media about the company's performance during bankruptcy, such as this one from a trade publication:

"Federal-Mogul Corp. CEO Frank Macher says, despite his company's Chapter 11 bankruptcy status, the supplier is in good standing and poised to report positive third-quarter 2002 earnings.

Speaking at the opening of Federal-Mogul's new Automotive Friction Products Technical Center in Plymouth, MI, Macher says the company's Chapter 11 status, which stems from asbestos-related claims filed against it, has not disrupted business.

"In fact, we've improved delivery and performance," he says.

Federal-Mogul received an extension for filing a reorganization plan from Nov. 1 to March 3, 2003, but Macher says the supplier actually is ahead of schedule with its restructuring."

(Ward's Auto World, "Federal-Mogul Confident," November 1, 2002)

Indeed, Federal-Mogul recently appeared sufficiently healthy just last year that it sought to acquire even more asbestos liabilities while in bankruptcy. In a widely criticized and controversial move, Federal-Mogul sought to acquire Bendix from Honeywell:

"Termed 'breathtaking in its audacity' by some and 'inspired' by others, the proposal was that F-M would acquire Bendix from Honeywell for free, taking the business and its associated asbestos liability insurance. Honeywell would finally be rid of Bendix, a division it had long tried to divest, and Federal-Mogul would gain another related product line to bolster its post-bankruptcy business operations."

(eBearing News, "Federal-Mogul and Honeywell End Bendix Acquisition Talks," Jan. 20, 2004. See:http://www.ebearing.com/news2004/012001.htm)

General Motors, Ford and DaimlerChrysler sued to block the acquisition, which they called a "fraudulent transfer," because of its potential consequences for Detroit's auto industry:

"The Big Three aim to stop what they call a "fraudulent transfer" of Bendix assets from Honeywell to Federal-Mogul, a move they claim is designed solely to bury 47,000+ Bendix asbestos claims in Federal-Mogul's bankruptcy. If Federal-Mogul is allowed to acquire Bendix, the mountain of asbestos claims against Bendix would be channeled into the Federal-Mogul asbestos trust, freeing Honeywell and Federal-Mogul from liability once the F-M reorganization is complete."

(eBearing News, "Federal-Mogul Reorganization Hits Setbacks," October 7, 2003. See:http://www.eBearing.com/news2003/100701.htm)


"Ford, GM and DC are co-defendants in many of the asbestos claims filed against Bendix; the transaction would leave them as the only solvent targets for many claims. The Big Three said in a statement, "Bankruptcy protection cannot be bought and sold. Federal-Mogul's and Honeywell's unprecedented attempt to do so would violate federal and state law, be unfair to thousands of asbestos claimants and inappropriately shift litigation costs to the automakers."

(eBearing News, "Federal-Mogul and Honeywell End Bendix Acquisition Talks," Jan. 20, 2004 See:http://www.ebearing.com/news2004/012001.htm)

(See also: New York Times, "Automakers Sue Over Asbestos Maneuver," 9/26/03)

Though the Honeywell/Bendix deal fell through in January 2004, Federal-Mogul has reportedly continued to make investments while in bankruptcy as part of its goal of emerging "asbestos-free and with a strong balance sheet."

(eBearing News, "Federal-Mogul Reorganization Hits Setbacks," October 7, 2003. See: http://www.eBearing.com/news2003/100701.htm)

The company also claims to be meeting all the needs of their customers while in bankruptcy.

Federal-Mogul Fortune 500
rankings 1997-2003

Year Rank Revenue
1997 (Ranked #670 on 
Fortune 1000)
1998 #349 $4.469 Billion
1999 #264 $6.487 Billion
2000 #298 $6.013 Billion
2001 #321 $5.457 Billion
2002 #310 $5.422 Billion
2003 #328 $5.546 Billion

(Source: Fortune Magazine 1998-2004)

According to EWG's review of press statements by Federal-Mogul, most of the company's job cuts over the last five years have been the result of automation and duplicative positions eliminated following the flurry of acquisitions. Other times, the company has simply blamed a tough economy for job cuts. Neither Federal-Mogul's asbestos liabilities nor its bankruptcy have ever been blamed for the job cuts in any company public relations that EWG has reviewed.

Federal-Mogul has also remained on the Fortune 500 list, holding onto the prestige of being one of the nation's biggest companies in the country based on annual sales. Despite its bankruptcy, it holds a higher rank on the list today than it did in 1998 when it joined the list following its many acquisitions.