What if?

By DAVID MOON, Moon Capital Management, LLC
December 13, 2009

Dubai World is a diversified international holding company owned by the government of Dubai and Sheikh Mohammed bin Rashid Al Maktoum. The company operates businesses in property development, hospitality and tourism, retail, aviation and financial services. It owns the world’s tallest building, largest shopping mall and an indoor snow skiing resort. It is developing a series of man-made palm-shaped islands with private residences. The least expensive rooms at its Burj al Arab hotel rent for $1,000 a night.

On November 25, Dubai World announced that it was seeking a delay of at least six months in making payments on its more than $60 billion in debt. A week later, company officials re-estimated the problems and adjusted its timetable to “something longer than six months.”

Investors were not impressed. Moody’s downgraded its rating on much of the company’s debt to “junk” status.

For a company whose majority owners are one of the world’s richest countries and one of the world’s richest men, it was proof that even the world’s most prosperous are not immune from the dangers of excess leverage.

This isn’t the first time overzealous real estate development has wreaked havoc in the area. Only a few hundred miles southeast of Dubai, we are told that Babylonian developers ran into trouble trying to build a tower to heaven more than two thousand years ago.

There is more to the Dubai story, however, than just a reinforcement to the age-old warning against the dangers of human hubris. There is a lesson regarding the relationships among politics, business and our national security interests.

You likely first heard of Dubai World in 2006 when it was about to purchase a British company that managed shipping ports around the world, including 22 in the U.S. A portion of the deal was ultimately stymied due to security concerns that a Dubai company shouldn’t be in charge of U.S. ports.

Senator Charles Schumer (D- NY) lead the successful effort to block the U.S. part of the transaction, thus allowing Dick Cheney’s old employer, Halliburton, to assume those port management contracts.

What might have happened if Dubai World had assumed the contracts to manage U.S. shipping ports? It appears as if this part of Dubai’s business is currently healthy – and may, in fact, be the most financially sound company in the entire conglomerate.

Is it a stretch to imagine that a company might divert resources from its healthy business to shore up its failing real estate holdings? Would this have an impact on the security at these ports? Is it a stretch to fathom that a desperate investor might be willing to do all sorts of things to protect more than $100 billion in assets?

You can call me a conspiracy theorist, but I agree with Schumer on this issue. I'm not thrilled that Halliburton is responsible for the security at these U.S. ports, but like Senator Schumer, I'm certainly glad that Dubai World isn't.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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