The Rise & Fall of a Billion-Dollar Company Enron - Term Paper Example

? The Rise & Fall of a Billion Dollar Company Enron No: The Rise & Fall of a Billion Dollar Company Enron Company Profile The journey of Enron started way back to 1985 when it acquired the assets of Houston Natural Gas and Omaha based at Inter North. Kenneth Lay, the former chief executive officer of the said company became CEO. Subsequently by dint of hard work, the following year, he was elevated to the coveted position of Chairperson (Fox, 2003). Later on, the company switched its business from pipeline to other lucrative businesses. In the year 1999, the company introduced its broadband services named as Enron Online, which was a website for trading commodities that enabled the company to acquire the largest position in the globe. A major chunk of business was acquired from online trade business (Fox, 2003). Growth of Enron over the years was tremendous. In the year 2000, the company's annual revenue touched the new heights of USD 100 billion. It stood at the position of the seventh largest company of the world as reported by the Fortune 500 and the sixth largest business entity in energy sector of the world. The company's stock price at capital market witnessed its peak that was 90 USD (Fusaro & Miller, 2002). Every one knew that Enron was the billionaire business conglomerate of the United States of America housed in Houston, Texas. The prime business of this entity was energy, commodities and services before it was declared bankrupt in the year 2001. It employed more than 20,000 employees to deal with their electricity natural gas, communication, pulp and paper company businesses that generated revenue around 101 billion USD (Fusaro & Miller, 2002). The renowned business magazine “Fortune” placed Enron as America’s the most innovative company for consecutive six years. In the year 2001, the signs of financial frauds came to surface in the said company. This had created a storm in the corporate world. With this financial scam, many questions were raised about the efficiency of standard accounting practice. To overcome this situation in future, the legislators of USA created Sarbanes Oxley Act of 2002 (McLean & Elkind, 2003). The dissolution of Arthur Anderson accounting firm had jolted number of companies around the world. The Enron financial scam was considered as one of the biggest and perhaps most complex bankruptcy cases in the history of United States of America (Fox, 2003). Incumbents In the year 1990, Jeff Skilling, Chief Financial Officer, hired Andrew Fastow, who was well versed with the tricks of the trade wanted to exploit the energy market. To achieve the desired goal, Fastow established numerous entities to handle common business practices. It also allowed Enron to place liability in order to maintain a robust growth of stock price to keep its critical investment grade credit ratings intact (Swartz & Watkins, 2003). Kenneth Lee "Ken" Lay was an American businessman whose role in terms of widely reported corruption that caused the downfall of Enron cannot be undermined. He and Enron became the part and parcel of corporate abuse and accounting fraud. Lay was enjoying the status of CEO and Chairman of Enron over a period of two decades till his resignation (Brewer & Hansen, 2002). In the year 2004, Lay was indicted by a constituted grand jury on 11 counts concerning securities’ frauds. The trial of Lay and Skilling began in Houston wherein Lay was found guilty on account of committing and abetting financial frauds. The competent court of law awarded him punishment on 10 counts leaving the 11th count relating to securities fraud, making false and misleading statements. Each count as per American Law attracted maximum 5 to 10 years rigorous imprisonment (Hodak, 2007). In the year 1999, Jeff Skilling raised the cash by selling off his assets to overcome the paucity of funds. The assets of Enron Oil and Gas Company were put on sale for gaining information about the market value. The company ran its business smoothly in terms of producing desired cash. At the boom period, Skilling sold the Enron’s 53% stake in Oil and Gas amounting to USD 600 million. This had provided great opportunity to other sister concerns of Enron for funding its various projects. Moreover in the year 2000, Skilling planned to sell Enron's international white elephants at book value of USD 7 billion, to the investors of United Arab Emirates but that deal could not be materialized (Brewer & Hansen, 2002). Trial The trial was held on January in Houston, in spite of repeated requests of the defense counsel for a change of venue on the plea that "it was impossible to get a fair trial in Houston. Investors lost billions of dollars in the shady business. The imprudent business practices caused the company irreparable losses. On the other hand, the said incumbents amassed ill gotten wealth estimated to 40 billion USD. On 25th May 2006, Lay was found guilty by a grand jury comprising eight women and four men. In another trial, court of Judge Lake, found him guilty of fraud and false statements (Hodak, 2007). Bankruptcy In the eyes of law, Bankruptcy does not mean that a company should cease to exist. It means that it cannot fulfill its financial obligations. It seeks protection from its creditors through competent court of law. The court in return gets hold of company’s assets to dispose off its assets to satisfy the creditors from the proceeds of sold assets as per their share in investments (Fox, 2003). The issue of Enron was somewhat complex in terms of its assets as compared to its liabilities although its assets had worth of billions of dollars. The problem was that its disposable assets were less than its existing liabilities. Further, the company was facing acute shortage of funds. Amongst some of the assets of the company, which included power plant at Dabnol, India was considered to be the white elephant. In crude definition, white elephant is an asset, which has the potential value but presently generates no profit (Brewer & Hansen, 2002). Offshore projects The Dabnol plant was treated as a multi billion dollar offshore investment in India. The said project was accomplished in two stages. The first stage was the usage of naphtha as fuel. Comparatively, the second stage was considerably expensive and technologically sophisticated than the first. The second stage was conversion of liquefied natural gas (LNG) which required very expensive infrastructure. The LNG would have to be brought by way of special port in refrigerated tankers costing hundreds of millions of dollars each (McLean & Elkind, 2003). Keeping in mind the cost to be incurred on such sort of expensive projects, no company intended to undertake such an investment in specialized equipments unless it was backed by the market forces. Before starting mentioned project, Enron negotiated a deal with the Indian politicians, actively involving the government of Maharastra against the payment of nearly 1.3 billion USD each year over a period of two decades. The opposition was quite against it and demanded its withdrawal. The politicians who inked the agreement failed to deliver as desired by Enron (Fox, 2003). Domestic Projects By the year 2001, Enron Broadband Services suffered considerable losses. In the first quarter, the loss was to the extent of 35 million USD. This loss continued over subsequent quarters (Fusaro & Miller, 2002). This was the time when the future of Enron Broad Services became bleak. Andrew Fastow came to save the skin of cited entity. Entities were purchased for the business of EBS at an inflated rate that enabled EBS to show windfall profit from its normal operations. Moreover, they assured that Enron or its subsidiaries would buy back sold securities at even higher rate. In our opinion, if that sort of catastrophe could turn into profit by said gentleman then it could do anything to convert business entity into profitable venture (Fusaro & Miller, 2002). Mind boggling Expenses The unreasonable expenses incurred by the Corporate Entities on purchasing luxurious items were unfortunate. The Enron at the last leg of its operations spent millions of dollars of borrowed money to have luxurious items. One of such lavish spending was the traveling expenses of corporate managers who traveled on corporate airplanes. The corporate airplanes are more costly than the commercial airplanes. Due to high operating cost plus the non-productive expenses on corporate airplanes, the company’s existence was put in jeopardy (McLean & Elkind, 2003). During the tenure of Kinder, there were five corporate aircrafts, two of them were Cessna Citations. The Cessna Citation was a relatively low cost jet airliner that had the capacity to absorb six passengers with a speed of 400 miles per hour. Its hourly operating cost was around USD 1500. Here we may draw the comparison between airliners in terms of big and small airliners (Brewer & Hansen, 2002). Soon after leaving Mr. Kinder, the employees waited for that time, when the management would sell airliners of the company. A few weeks after leaving of Kinder, the management sold the Cessna Citations to replace them with two Hawker 800's. At the time of Kinder, the airliners were limited to official purposes. Later on, they were used for personal purposes. Kinder was able to severely restrict the use of the corporate aircraft of business entities. Soon after leaving of Kinder, the personal use of the aircraft was escalated (Brewer & Hansen, 2002). Then the company moved on to Falcon, which carried 13 passengers. The price tag of two Falcons was determined to be around USD 30 million and operational cost of the planes was nearly USD 5200 per hour to operate. With the passage of time, another Hawker 800 was purchased that had made a mini size airline company, which consisted of six planes (Fusaro & Miller, 2002). In the year 2001, it was decided by Ken Lay to have an even bigger airliner. He referred the matter to the Board of Directors of Enron for approval to purchase a Gulf Stream-V corporate jet plane having capacity of 16 passengers on board. It could fly from Houston to Europe non-stop. Its cost was USD 42 million. Surely, Enron could afford it with such luxuries even if it had lost USD 464 million in its first quarter of 2001 (Fusaro & Miller, 2002). Fall of Enron In the year 2004, the top notch of Enron, Kenneth Lay and Jeff Skilling, were implicated. They were tried in a court of law and convicted in the year 2006. Before imposition of the court judgment, Kenneth Lay died at the age of 64. Some people believed that the fall of Enron mainly attributed to human greed. The comprehensive definition of greed is “an excessive desire of human lust to possess more than it needed”. The other segment of the society was of the view that some imprudent decision of management led to fall of Enron (Hodak, 2007). It can be because of over confidence of the then management who made some faulty decisions at that time that caused losses of billion dollars to the creditors. In the light of key management’s decision, company was compelled to venture into that business for which they had no previous experience thus failed miserably. Had they developed an expertise before venturing into new businesses, the situation would have been the other way round (Swartz & Watkins, 2003). The failure of management of Enron caused the mismanagement of resources and at last fall of Enron. They had violated the healthy norms of business due to their burning desire for amassing more and more wealth. No one classified Beatles greedy even though they made a lot of money. Take the example of Ivan Boesky who made a lot of money but less than the money that Beatles had. Credit goes to the top management who had violated the business norms in vogue. They were highly paid professionals with regard to their quality performance yester years. We have identified the factors that led to the collapse of Enron. The conclusion of the failure of business giant was the result of management errors and nothing else but management errors, driven from unjustified overconfidence, reflected in their imprudent decisions (Fox, 2003). References Brewer, L. & Hansen, M. S. (2002). House of Cards, Confessions of an Enron Executive. New York: Virtualbookworm.com Publishing. (Brewer & Hansen, 2002) Fox, L. (2003). Enron: The Rise and Fall. Hoboken, New Jersey: Wiley Publishers. Fusaro, P. C. & Miller, R. M. (2002). What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S. History. New Jersey: Wiley Publishers. Hodak, M. (2007). The Enron Scandal. Organizational Behavior Research Center Papers (SSRN). McLean, B. & Elkind, P. (2003). Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio Publishers. Swartz, M. & Watkins, M. (2003). Power Failure: The Inside Story of the Collapse of Enron. USA: Doubleday Publishers. Read More