The Fall of Enron

The Fall of Enron

This is a story of Enron Corporation, the company that reached paramount heights, in order to face a fall in the end. Its failure affected thousands of employees and had significant impact on Wall Street. At the peak of success, its shares were worth $90.75; but after declaring bankruptcy on December 2, 2001, company’s shares were trading at $0.26. It is a subject of ongoing discussions on how such a powerful business, described as one of the largest companies in the US at that time, managed to vanish almost overnight and fool the regulators with fake holdings and off the books accounting for so long.

History of Enron
Created in 1986 in US by Ken Lay, Enron saw an opportunity in gas industry, which was undergoing massive deregulation during the period. Soon Ken Lay hired Jeff Skilling, McKinsey consultant. Skilling had an idea of trading energy, especially natural gas, as a commodity and adopting an accounting system, called mark to market. Developed by traders in the 1980’s this new form of accounting allowed accounting for the fair value of an asset or liability to be based on the current market price, however this figure could also be obtained through any other objective process; in effect, accountants could value assets and liabilities at any value they saw fit. that would ensure the success of Enron for the future.
Enron managed to set itself as a Gas Bank through which buyers and sellers of natural gas could transact with each other using an intermediary (Enron) whose contractual arrangements would provide both parties with reliability and predictability regarding pricing and delivery. Skilling overlooked the running of this business and managed to build up a major gas trading operation through the early nineties.
Following the success in natural gas industry, soon Enron was extending its core operations into a wider power supply business, initially in the USA, then on an international scale, completing a large plant at Teesside in the UK, and contracting to build a huge plant near Mumbai in India. Soon it had deals all-round the globe, from South America to China. The hard driving expansion of Enron’s power business worldwide created a global reputation for Enron.
Main objective developed by skilling was to transform Enron into a large, international asset-light corporation, focusing on trading power generally, with his next target to be electricity trading. Enron was actively lobbying Washington to deregulate electricity supply and in the anticipation of such outcomes soon, the company ended up buying a power plant on the west coast.  Soon Enron developed a national reputation, which rested on the rapid expansion of its domestic business and its steadily growing revenue and earnings from trading. This record of accomplishment was indeed caused by Skilling, who was appointed as a Chief Operating Officer by Ken Lay and he then embarked upon transforming the whole of Enron to reflect his vision.
San Francisco, California was an early target for company’s aggressive and misguided expansion. Observing the dotcom boom, Skilling decided Enron could create a business based on a broadband network, which could supply and trade bandwidth and he set out to build this at a great pace. However, the experiment in deregulation in California did not work well and in due course was reversed with recriminations all round. Moreover, the international business expansion was not underpinned by adequate administration and many of the contracts later turned bad.
So Enron then took the decision to build on its international presence by becoming a global leader in the water industry and bought a big water company in the UK, following it up with a big deal in Argentina.
At this point, around 2000, Enron’s reputation was still riding high and Lay and Skilling were looked up to as visionary thinkers and top business leaders.
However, as we see elsewhere in this case study, the rapid expansion had run well ahead of Enron’s ability to fund it, and to address the problem, it had secretly created a complex web of off-balance sheet financing vehicles. These, unwisely, were ultimately secured, and hence dependent, on Enron’s rapidly rising share price.