Term Paper on "1985 Enron Was Born of a Merger"

Term Paper 10 pages (3102 words) Sources: 8

[EXCERPT] . . . .

1985 Enron was born of a merger between Houston Natural Gas and Internorth, a Nebraska pipeline company. During the merger Enron subsequently incurred a large amount of debt in addition to losing exclusive rights to the use of the pipeline due to deregulation of natural gas pipelines. It was vital at this time for the company to embark on a new business strategy if they were to stay in business. The CEO, Kenneth Lay, hired McKinsey & Co. As consultants with Jeffery Skilling as the liaison. Part of Skilling's strategy was to create an energy derivative by establishing "gas banks," allowing Enron to buy gas from a network of suppliers and then turn around and sell it to consumers while collecting transaction fees at every point and guaranteeing the supply and price (Thomas, 2002). This discussion will focus on two books related to accounting, business and the overall theme of ethics. The first work Thomas' "The Rise and Fall of Enron" details the evolution of this corporate giant and traces its actions from a startup firm to one of the largest energy trading firms in the nation. Consequently, Thomas also details how Enron's fall only serves as the penultimate example of how business ethics can be violated for the sake of profit.

The 1990s saw a long running bull market which opened the opportunities for other investments. By 1996 Skilling had become the chief operating officer of Enron and convinced Lay that the gas model, which had been successful, could be applied to electric energy as well. Lay and Skilling then embarked on a quest to gather the political will to18 deregulate the electric energy industry. By 1997 Enron acquired their first electric company, the Portland General Electric Corp and a new division, the Enron Capital and Trade Resources, was created which went on to become the nation's largest wholesale buyer and seller of natural gas and electric energy. Revenues skyrocketed from two billion to seven billion and the Enron workforce went from two hundred employees to two thousand (Thomas, 2002).

In 1999 Enron launched Enron Online, an electronic commodities website in which they were a buyer or a seller in every transaction and handled $355 billion in online commodities trading in 2000. Enron also attempted to get into the booming technology industry by announcing plans to build a high-speed broadband telecommunications network to trade network capacity or bandwidth, similar to the gas and electric banks. Enron also announced a deal with Blockbuster to provide video on demand through high-speed internet lines (Thomas, 2002).

As the competition mounted in the late 1990s, Enron began to see their profits erode as other entrants entered the market. In addition to this, energy prices started to fall which limited the opportunities for making the large trading gains that kept the company profitable in the past. During this time panic began to set in any deal that could get done was done (Thomas, 2002).

Deregulation in the energy markets created an environment where industry was open to experimentation and the Enron executives cultivated a culture that would push the limits to be daring and clever during its experimentation with deregulation and the energy market. For some employees it became apparent the rules were only there to be broken in the name of profits. The standards of performance were constantly being pushed upward forcing the employees to comprise ethical behavior more and more. This is akin to the slippery slope, of which the review process was also part of cultivating the cut-throat competitive environment (Sims & Brinkmann, 2003).

Skilling worked to compete with some of the top investment banks to recruit the best talent from the top MBA programs in the country. In return for the long hours they would be working, Enron would pamper them with bonuses, concierge services and gym memberships. Internally the environment was highly competitive. Skilling instituted a performance review committee claimed to be known as one of the toughest (Thomas, 2002).

The review process was known as the 360 degree review, meant to be based on the company's values of respect, integrity, communication and excellence. It did not take long for employees to start feeling as if the only performance measure that was even remotely important was what they posted as profits for the company. This created an incentive to close any deal possible where instant gratification was more important than the long-term potential of the deal (Thomas, 2002).

Eventually it became apparent to the executives at Enron that they were going to have to ante up and face the consequences at some point. In their 2000 financial statements there was a footnote describing a highly complex transaction. The transaction involved the special purpose entity of LJM Cayman LP and LJM2 Co-investment. The LJM partnerships invested in another special purpose entity known as the Raptor vehicles in an attempt to hedge the investment in a broadband company. To capitalize Raptor Enron issued common stock for notes receivable and shareholder's equity which violates generally accepted accounting principles (Thomas, 2002).

Once these irregularities were found as a result of the footnote on Enron's 2000 financial statement skeptics started casting doubt on the credibility of Enron by April of 2001. When questioned about the statements Skilling got very disgruntled and actually called an analyst a derogatory name; looking back now it is easy to see that Skilling knew the house was crumbling beneath him putting him a little on edge. Aimed this outburst, many outsiders were starting to question Enron and the trust in the company's reputation plummeted with its stock until they were forced into bankruptcy in December of 2001 (Thomas, 2002).

Ken Lay, who had been the head of Enron since 1985, retired in February of 2001 and named Skilling as the companies new CEO. While the stock had slipped a bit, down to eighty dollars a share from its all time high of over ninety dollars, Skilling was still claiming the shares were going to go back up to over one hundred dollars a share at an annual conference with analyst. These optimistic claims would not come to fruition.

By March, one month after Skilling had taken over as CEO, the stocks for Enron and gone down again to sixty dollars a share. Senior management had started selling of their stock in August of 2000, a foreshadowing of things to come. By August of 2001 Skilling also had decided to resign and Enron stock again went down to forty dollars a share. In the month of August Lay, who was still head of the board, received a letter from a vice president with the company that basically said she believed the company was going to implode due to the special purpose entities ran by Fastow. At this point Lay contacted the attorneys and their auditor, Arthur Anderson, to look into the matter (Thomas, 2002).

In October of 2001 Enron recorded its first loss in four years. The company could not longer hide the losses contained in the Rapture hedging because they could not issue anymore stock to offset the liabilities and also had to record $1.2 billion loss because of the special purpose entities partnerships Enron had acquired. At this point the Security Exchange commission began an informal investigation into Enron. The executives also made changes to the companies pensions plans and the employee's investments in the companies stocks were frozen and they were not allowed to sell their stock, yet many of the senior managers had already sold theirs and made a hefty sum (Thomas, 2002).

On October 22 Enron announced that the SEC was opening a formal investigation into the numerous partnerships and by the beginning of November Enron announced a restatement of their financial statements dating back to 1997 which recorded almost $600 million in losses and another $628 in liabilities. The stocks went down to ten dollars a share and on December 2 Enron filed for bankruptcy (Thomas, 2002).

Corporate social responsibility entails four different categories; economic, legal, ethical and philanthropic. Someone with a corporate social responsibility perspective believes that business has an economic responsibility to produce goods and services that consumers want at a fair price. When businesses consider their economic responsibilities this includes financial incentives, revenues, costs, investment and a number of other concepts aimed at maximizing long-term financial performance of the business (Buchholtz & Carroll 2008). While Enron initially set out to innovate and diversify their holdings, the culture that developed was more short-sighted than far-sighted. Employee's were encouraged to take risks, big risks, in order to ensure they were posting enough profit to keep their jobs. Fastow played fast and lose with the companies assets and liabilities by using a number of special purpose entities to bolster up the companies balance sheets (Thomas, 2002).

One of the largest economic responsibilities a company has it to their consumers. For those who lived in California, it was due to manipulation of the power market by Enron and other companies that caused the… READ MORE

How to Reference "1985 Enron Was Born of a Merger" Term Paper in a Bibliography

Related Term Papers:

Enron Bounded Ethicality Is a Psychological Concept Essay

Enron

Bounded ethicality is a psychological concept wherein a person is unable to fully understand the ethical consequences of their actions. The general idea is that there are times when… read more

Essay 2 pages (715 words) Sources: 2 Topic: Accounting / Auditing

---

Enron's Misleading Accounting & Fraud Tactics Thesis

Enron was the seventh-largest corporation in the world. Enron Company was divided into five distinct parts including; Wholesale Services, Transportation and Distribution, Broadband Services, Retail Energy Services, and Corporate and… read more

Thesis 98 pages (27112 words) Sources: 20 Topic: Business / Corporations / E-commerce

---

Merger Financial Analysis of the 2006 Term Paper

Merger

Financial Analysis of the 2006 Merger of Hewlett-Packard and Mercury Interactive: A Case Study

In July of 2006, Hewlett Packard announced it had signed a deal with Mercury Interactive… read more

Term Paper 5 pages (1648 words) Sources: 5 Topic: Economics / Finance / Banking

---

Merger Activity Due in Large Term Paper

merger activity due in large part to the internationalization of trade, the globalization of the transportation industry and innovations in telecommunications. Mergers have been used for a wide range of… read more

Term Paper 27 pages (7696 words) Sources: 40 Topic: Business / Corporations / E-commerce

---

Mergers and Acquisitions Organizational Characteristics Term Paper

Mergers and Acquisitions (Organizational Characteristics)

The practice of merging and acquiring new firms from different countries has greatly increased over the past fifteen years (Moeller and Schlingemann, 2005 as cited… read more

Term Paper 9 pages (3723 words) Sources: 9 Topic: Business / Corporations / E-commerce

---

View 100+ more related papers  >>