Three unwise companies, some warning signs then no room at th e inn
The Herald (United Kingdom); Dec 23, 2001
AS Enron discovered, making the leap between being America's biggest company and the country's largest bankruptcy is all too easy.
All that was required of the Texas-based energy trader was $50 billion of debt, inflated earnings, a few off-the-book deals, some gullible analysts and, according to its auditors' testimony to Congress, ''possible illegal acts within the company.''
The end result of this, witnessed at the beginning of the month, was the largest Chapter 11 reorganisation in history (with assets of $60bn). With its stock dropping 90% since mid-October to just 26 cents, the surprise was perhaps that it took so long for its credit rating to be downgraded to junk status, thereby forcing its collapse. This was, after all, a business whose underperforming international assets had been causing concern since June, according to Standard & Poor's statements.
Even if the decision by rival energy firm, Dynegy, to bail out of a $9bn all-stock deal after discovering unanticipated debt and cash flow problems was the final nail in the coffin, the game was up before it hit the ground hard.
Back in 1986 when Enron was just another Texan oil and gas business, and its revenue a mere $7.6bn, its ambitions were a little more reasonable as it set its sights on being the biggest natural gas pipeline operator in the US. Following the deregulation of the country's natural gas industry, the market had to find new ways of contracting for gas in the wholesale market. So a GasBank was established, allowing producers and wholesale buyers to purchase firm gas supplies and hedge the price risk of the new spot market at the same time.
With massive international expansion in the early 90s, it then went on to become the biggest marketer of electricity in the US. By the end of the 90s, it was probably the biggest merchant in the UK and Europe, with revenues supposedly coming in at over $100bn.
Where Enron came unstuck, however, was in its rejection of assets in favour of intellectual capital. Given the complexity of its corporate and financial structure, cynics might have suggested that its eagerness to recruit 250 MBAs each year was simply an attempt to outsmart the market.
By working hard to find ways to keep several bizarrely named investment companies (JEDI and Raptor), which some believe were created to allow Enron to gain from stocks it owned without selling them, off the books, the Texan business ensured its own downfall.
The fact that Enron then put $1.2bn of its stock into one of these companies, put it on its balance sheet as an asset, and was then forced to reveal that it had marked up its own net worth by $1.2bn, was the fatal blow. After reporting this fact and a third-quarter loss of $628m, it quickly found itself unable to raise credit. Bankruptcy was just around the corner.
The end result of a bold - if potentially illegal - attempt to create a new business for the new millennium has been the loss of over 4000 jobs, millions lost in savings and pensions, as well as the financial knock to global companies exposed to the fallout. Among them were US operations such as JP Morgan, Citigroup and Bank of America, and UK ones such as the Royal Bank of Scotland.
With questions now being asked about the role of former Enron head Kenneth Lay, his successor and former CEO Jeffrey Skilling, Andrew Fastow, the chief financial officer who parted company with Enron mysteriously in August 2001, and the other board members, there seems no doubt that Enron hoodwinked Wall Street.
Whether it leads to tougher corporate oversight regulations, legal action against accountants Andersen, or indeed criminal charges being pressed by up to four US attorney offices remains to be seen. No matter what, Enron clearly proved that the snake-oil salesmen were alive and well in the 21st century's new economy.
Despite the focus on the role management played in the downfall of telecoms equipment manufacturer Marconi, there is no doubt that it ran into a brick wall created by unusual - albeit predictable - market events.
The company, described glowingly by its former chief executive Lord George Simpson as ''dynamic, youthful, without hierarchy and formality'', appeared to founder because of these very sexy attributes.
Some would say that Simpson was trying too hard to eradicate the company's past as mighty defence business GEC and move into the whizz-bang world of modern telecommunications systems, ignoring the problems inherent in an immature market enjoying unprecedented and unsustainable growth.
In Simpson's defence, he was playing the same games as his rivals - Cisco Systems, Nortel, and Alcatel - and, like them, he got burned. Or more precisely, to use the phrase-ology of Cisco chief John Chambers, he was drowned, in a ''once-in-a-100-year flood''.
With Marconi suffering the biggest one-day fall of a FTSE 100 stock in recent memory, the events leading up to that terrible day in July involved a series of bad decisions made worse by market overreaction.
Since the beginning of 2001 Simpson and his finance director, John Mayo, had made a series of positive trading statements, saying as late as May that Marconi was still expecting growing revenues. So when Simpson announced poorer earnings and admitted to a US slowdown - which the markets were well aware of - investors and brokers vented their anger at the news and the board's decision to opt for a 24-hour shares suspension in a bid to prevent anyone trading on mixed news of the telecoms group's disappointing (pounds) 780m disposal of its medical systems business.
While, like Enron, executive arrogance or stupidity (perhaps both) clearly played a part in the business's near collapse, the decimation of its market cap to less than (pounds) 3bn was unnecessary despite a (pounds) 4bn debt pile, slowing sales, and job cuts.
Simpson and Mayo had made some mistakes, paying almost (pounds) 3.5bn in cash - not stock - for two US acquisitions at the height of the communications boom. In October, the company was finally forced to write-down its worthless purchases.
However, since the departure of Mayo (pushed) and Lord Simpson (pushed with a controversial pay-off), acting chairman Derek Bonham has managed to stabilise the business, particularly its vital relationship with supporting banks.
Although its performance has not really picked up yet - difficult given the market slump for telecommunications equipment - if the debt mountain can be handled and new business found, Bonham may yet turn Marconi, once a flagship of British industry, around.
Unfortunately for Atlantic Telecom, the Aberdeen-based telecoms company, recovery was not an option. Sunk by August, the company gave in to the inevitable as it simply ran out of cash. Of course, it didn't help that losses had outstripped revenues for some time.
Atlantic had been under siege for weeks by a group of bond-holders who were calling on it to seek a voluntary wind-up in a bid to save the remaining cash needed to save creditors. Although CEO Graham Duncan claimed that the business had enough to last it until it became cash positive, it was painfully clearly that its networks and assets were overvalued at almost (pounds) 700m.
The company, which had been transformed by founder Duncan from a cable business into a provider of fixed radio access (FRA) telecoms services to residential and business customers, and then a broadband network provider in Germany, was always unlikely to survive. Debate about whether it was an unfortunate victim of the telecoms slump or whether strategic mistakes such as the (pounds) 350m acquisition of German firm First Telecom were to blame is almost unnecessary.
Atlantic had attempted to compete into a telecoms service market BT had spent decades and billions building. It operated with a flawed technology that industry experts admitted was almost impossible to make revenue out of, and looked to costly and immature broadband markets, when it realised its own business plan was fatally flawed. Ultimately, the restructuring which began at the start of 2000 was simply the first real admission that Atlantic wasn't working.
After it shed hundreds of staff, it was left to administrators PricewaterhouseCoopers to reduce the company's failure to farce. After abruptly cutting telephone services to over 10,000 users - without giving them any official notice - ad hoc protest groups were formed in a bid to give businesses time to switch phone companies.
Eventually, a (pounds) 500,000 Scottish Executive and DTI ''rescue package'' to delay the cut-off was put in place, as PricewaterhouseCoopers struggled to raise any interest in Atlantic's assets despite a previous valuation of (pounds) 438m and initial bizarre claims that it could be sold off as a going concern. If any buyers are found in the New Year, less than (pounds) 10m is now likely to be raised.
All Material Subject to Copyright |
