'99 Deal Failed After Scrutiny of Enron
"When you have so many moving parts like Enron had,
not even an analyst worth his salt could have figured
the company out," he said. "What would have helped is
full disclosure by Enron. Accounting mandates by
the F.A.S.B. and the S.E.C. would have saved the
company from itself and from bankruptcy."
January 27, 2002
The New York Times
By NEELA BANERJEE
This article was reported by Edmund L. Andrews, Neela Banerjee and Andrew Ross Sorkin
and written by Ms. Banerjee.
HOUSTON, Jan. 26 — Three years ago, a German company pieced together a
picture of the Enron Corporation's finances so troubling that it
helped persuade the company to call off a merger with Enron, executives in
Germany and the United States said.
The 1999 deal would have combined Enron and Veba, a utility company based in
Düsseldorf, Germany, in a so-called merger of equals. The negotiations collapsed
amid a clash of egos between the Germans and the Americans and the growing
sense at Veba that Enron was actually going to take it over, executives involved in
the talks recalled.
But Veba also became concerned about the levels of debt Enron had and with what
a senior executive said were Enron's "aggressive accounting practices." Consultants
from PricewaterhouseCoopers told Veba that Enron, through complex accounting
and deal making, had swept tens of millions of dollars in debt off its books, making
the company's balance sheet look stronger than it really was, according to people
involved in analyzing the failed deal.
The consultants drew on public sources like trade publications and securities
filings, these people said. It could not be determined if the talks reached the stage
at which the companies exchanged confidential financial information.
It was similar questions about partnerships and other
devices used by Enron to shift debt off its books that
precipitated the company's financial collapse last fall.
Securities experts said the fact that a potential merger
partner had such doubts years earlier suggested the
problems might have been apparent if Wall Street or
federal regulators had been looking more closely.
PricewaterhouseCoopers was one of several banks and
consulting firms that worked on the Veba-Enron deal.
Other advisers included Goldman, Sachs, Credit Suisse
First Boston and McKinsey & Company, bankers and
consultants said.
The auditing arm of PricewaterhouseCoopers is listed in
an offering document as the accountant for the LJM2
partnership that was run by Enron's chief financial officer.
A spokesman for the firm said, however, that
PricewaterhouseCoopers had "never been the auditor of
any of the partnerships." He said he could not confirm
details of the firm's involvement as an adviser to Veba.
Press officers for the other advisory firms declined to
comment on the Veba-Enron deal.
In the wake of Enron's collapse, it has become apparent
that many financial firms — from Enron's lenders to Wall
Street bankers who underwrote the company's
partnerships to investment houses that bought into them
to the accountants who reviewed their books — knew more
about Enron's condition than the company publicly
disclosed.
But for many reasons, that knowledge did not translate
into action to put the brakes on Enron's deal making or to
force the company to disclose more about its finances
until last fall, when Enron was already under investigation
by the Securities and Exchange Commission.
Securities laws, for example, put restrictions on how
information can be shared inside investment firms. Many
of the congressional committees examining Enron's
collapse are looking at whether loopholes in disclosure
and accounting rules made it possible for Enron to hide its
true condition.
Still, there was enough information available to make
Veba dubious about Enron.
"We were wondering why this wasn't common knowledge, or why it wasn't
discovered by those people whose business it was to discover these things," said
one of the people who worked on analyzing the deal. He agreed to discuss the
episode on the condition that his firm not be identified.
Both Enron and Veba were looking to make acquisitions in 1999, when Europe,
like the United States, was deregulating its energy markets. Veba later merged
with another company to form E.ON, Germany's second-largest power company.
E.ON and Enron declined to comment on the details of the talks, which the
companies have never disclosed.
But several people involved in the failed transaction said that the negotiators talked
about basing the combined company in Düsseldorf. Ulrich Hartmann, the head of
Veba and now the chief executive of E.ON, would have been in charge, and Jeffrey
K. Skilling, then Enron's president, would have been his No. 2 and heir apparent.
As part of Veba's due diligence effort — the detailed financial and legal analysis
that precedes any deal — a team from PricewaterhouseCoopers worked for about
two weeks, people with knowledge of the effort said, scouring trade publications
and S.E.C. filings for information about Enron's deals. They eventually pieced
together a picture of a highly leveraged company far different from the glittering
industry leader that the rest of the equities market saw.
Veba concluded that Enron had shifted so much debt off its balance sheet accounts
that the company's total debt load amounted to 70 to 75 percent of its value as
expressed in its debt-to-equity ratio, executives said.
In March 1999, debt rating agencies would have probably calculated Enron's debt
level at about 54.1 percent, based on the information that the company disclosed
in regular reports to the S.E.C., according to John E. Olson, a longtime critic of
Enron and the head of equities research at Sanders Morris Harris, a Houston-
based securities firm.
Had regulators like the S.E.C. and rule makers at the Financial Accounting
Standards Board demanded more information from companies like Enron, Mr.
Olson said, its parlous finances would have been apparent much earlier.
"When you have so many moving parts like Enron had, not even an analyst worth
his salt could have figured the company out," he said. "What would have helped is
full disclosure by Enron. Accounting mandates by the F.A.S.B. and the S.E.C.
would have saved the company from itself and from bankruptcy."
Veba's advisers found that many people in the energy industry knew about Enron's
complex accounting practices, if in a piecemeal fashion, but few were willing to ask
hard questions about it.
"When things were going well," said one of the people involved in analyzing the
deal, "the view among those who knew about this kind of stuff was that Enron was
being Enron, which meant being clever."
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