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Halliburton Inc. announced this year that it is seeking a buyer for its Kellogg Brown & Root Inc., engineering business. The name may ring a bell for a number of reasons. KBR can’t stay off the front page for its Iraq contracts, but its biggest problem might be an investigation into Nigerian bribes in the late 1990s. The MW Kellogg unit of Dresser Industries Inc., acquired by then-chief executive Dick Cheney’s Halliburton in 1998, was part of a consortium suspected of funneling tens of millions of dollars to Nigeria’s president in exchange for gas contracts. Halliburton executives might think that now is a good time to unload KBR, but anti-corruption lawyers are skeptical. Bribery used to be low on the checklist for corporate due diligence. Thanks to aggressive enforcement of the Foreign Corrupt Practices Act, however, that’s changing fast. “When companies merged years ago,” says Martin Weinstein of Willkie Farr & Gallagher, “there was a general feeling that organizations came with warts. It’s a very new idea that an acquiror can be made to pay for sins that the target committed. And it changes the dynamics of how to do deals.” Corruption, it seems, has become a deal-breaker. For two decades, prosecutions under the U.S. Foreign Corrupt Practices Act of 1977 bumped along at the rate of one or two a year. But in the past year, the U.S. Department of Justice and the Securities and Exchange Commission have brought FCPA actions against (or settled with) six companies. Suspicions of past corruption in an acquisition target killed a $2 billion deal in 2004 — the planned purchase of The Titan Corp. by Lockheed Martin Cor. — and delayed two others on the order of $1 billion: the sale of ABB Ltd.’s energy assets to a private equity partnership, and the purchase of InVision Technologies Inc. by General Electric Co. The past year also saw two of the three steepest fines in the act’s history, with Titan paying a record $28.5 million. Experts — including the man who enforced the FCPA for 28 years, Peter Clark — attribute the surge in prosecution to two new developments. First, the Sarbanes-Oxley Act of 2002 is prodding corporations to ‘fess up to all manner of sins at an unprecedented rate. The second factor — considerably less well-known — is a global anti-bribery convention, signed in 1998 by the Organisation of Economic Co-operation and Development, which has mustered a cadre of anti-corruption cops in the rest of the wealthy world. Thirty-five nations have passed FCPA-style laws under the bribery pact, and an OECD monitoring group is ready to name and shame any state that lets its law slide. Suddenly, Peter Clarks are everywhere, including one swashbuckling French magistrate, Reynaud van Ruymbeke, who has played a crucial role in the Halliburton investigation. General counsel are scrubbing down. According to a survey by TRACE International Inc., a Washington, D.C., nonprofit group that promotes corporate compliance with corruption laws, large corporations spend an average of $1 million a year on anti-bribery programs. Northrop Grumman Corp., to pick a company in an industry prone to corruption, spends $2 million on outside anti-corruption counsel, while employing two in-house anti-corruption lawyers, supported by two paralegals and 17 staffers. But what if a clean company wants to buy a rogue? The Justice Department has shown a willingness to limit the risk borne by an acquiring company — but on strict conditions. The company must agree to individual and corporate guilty pleas, big fines, a serious compliance program, and a promise to be a good boy in the future. In return, it eliminates the prospect of being hit with a larger fine, suffering a blow to its reputation, and being barred from government contracts. Above all, such an agreement enables companies to remove the uncertainty that might torpedo a merger. The release procedure was pioneered by such lawyers as Danforth Newcomb of Shearman & Sterling, who represented ABB; Ray Banoun of Cadwalader, Wickersham & Taft, who represented the buyers of ABB’s energy assets; and Robert Bennett of Skadden, Arps, Slate, Meagher & Flom, who represented Cardinal Health Inc., in its 2003 acquisition of Syncor International. Some attorneys say the release procedure is not for everyone. Homer Moyer Jr. of Miller & Chevalier fears that disclosing corruption problems before a merger gives Justice too much negotiating power. If a company has a choice in the matter, he says, it might prefer to clean house during the postmerger transition. But Clark, who negotiated both releases for Justice before joining Cadwalader this year, says a buyer would be “crazy” not to seek a release. Halliburton offers the next test for the effect of corruption suspicions on mergers. The company states in a recent securities filing that it has found information suggesting the consortium including Kellogg considered payments to Nigerian officials, and that it’s possible that the government will find corruption violations. Guilty or not, the company might find it tricky to transfer a suspected business. In today’s climate, what will it take to sell Kellogg Brown & Root? Anti-corruption lawyers differ on this. Some think the M&A market can adjust to any risk in advance of a sale. “A buyer might simply accept the risk,” says Moyer, “and make an appropriate adjustment in the price.” Other lawyers take a hard line. “There’s no way KBR can be sold without the new buyer accepting liability,” says Banoun. If the Justice Department follows its recent pattern, any buyer for KBR will need to await a long investigation, and prepare to come clean before closing the deal. Dirty companies can be sold in 2005, but sooner or later they must be scoured.

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