enron mentions - 11 / 26 / 01 dynegy seems to have options in enron deal
the wall street journal , 11 / 26 / 01
volatility fell slightly in light holiday trading as enron calls , lilly puts attracted interest
the wall street journal , 11 / 26 / 01
the other instant powerhouse in energy trading
businessweek , 11 / 26 / 01
all eyes on the enron prize if the deal holds , dynegy will walk away with some juicy assets
businessweek , 11 / 26 / 01
confused about earnings ? you ' re not alone . here ' s what companies should do - - and what investors need to know
businessweek , 11 / 26 / 01
end the numbers game
businessweek , 11 / 26 / 01
free and clear of enron ' s woes
businessweek , 11 / 26 / 01
companies & finance international - enron still optimistic of averting financial meltdown .
financial times , 11 / 26 / 01
schwab chief ' s main theme : diversification
the wall street journal , 11 / 26 / 01
enron pursuing a cash infusion energy : company is seeking as much as $ 1 billion as it tries to shore up its endangered acquisition by dynegy .
los angeles times , 11 / 26 / 01
dynegy optimistic that enron merger will succeed - ft
dow jones international news , 11 / 26 / 01
dynegy purchase prompts antitrust concerns , l . a . times says
bloomberg , 11 / 26 / 01
enron hopes for infusion of capital : seeks us $ 500 m as talks of dynegy merger continue
national post , 11 / 26 / 01
india ' s aditya birla not eyeing enron ' s stake in dabhol
dow jones international news , 11 / 26 / 01
the enron scandal
business standard , 11 / 26 / 01
india ' s mehta comments on birla group offer to buy enron stake
bloomberg , 11 / 26 / 01
dynegy seems to have options in enron deal
by rebecca smith and robin sidel
staff reporters of the wall street journal
11 / 26 / 2001
the wall street journal
a 3
( copyright ( c ) 2001 , dow jones & company , inc . )
with the stock market telling dynegy inc . that energy trader enron corp . isn ' t worth even half what dynegy has offered to pay , analysts and investors are paying close attention to the circumstances under which dynegy could bargain a lower price or even walk away from the merger deal .
earlier this month , houston - based dynegy offered to buy its far larger cross - town rival in an all - stock deal that currently values enron shares at $ 10 . 85 apiece , or a total of about $ 9 . 2 billion . but in the wake of post - agreement disclosures by enron that its future earnings are likely to be substantially less than expected , the company ' s stock has been hammered . in 1 p . m . trading on the new york stock exchange on friday , enron shares fell 30 cents to $ 4 . 71 . the stock is down 94 % so far this year and far short of the per - share takeover price . dynegy shares rose 64 cents to $ 40 . 40 .
although dynegy and enron both say they are going ahead with the deal under the terms negotiated , dynegy does appear to have other options . the agreement with enron contains a broad " material adverse change " clause as well as some specific trigger points that could be invoked .
dynegy officials performed " due diligence " throughout the holiday weekend , seeking to learn more about the intimate workings of enron , which has suffered a series of damaging blows . since mid - october , enron has disclosed that some of its officers participated in personally enriching deals that moved assets off enron ' s balance sheet , for a time , to several private partnerships . those deals are now the subject of a securities and exchange commission investigation . past treatment of some of those deals has been termed an " accounting error " by enron and it twice has rejiggered its earnings since oct . 16 . at one point , enron restated downwards nearly five years of earnings .
an enron spokeswoman said the company was proceeding in the belief that the deal would be completed as agreed . dynegy spokesman john sousa said the two sides are forging ahead although he acknowledged that the walk - away provisions " are broad , by design , to ensure adequate protection for dynegy shareholders . " shareholders of both firms must still vote on the merger agreement .
clauses related to a " material adverse change , " also known as a " material adverse effect , " have been the focus of much attention among merger professionals this year , due , in part , to the stock market ' s fluctuations and the economic slowdown that have caused some buyers to reconsider planned acquisitions .
but such clauses rarely are invoked by a buyer or seller because they are considered extremely difficult to prove . both parties typically are reluctant to lay out specific terms for canceling a deal , much the way a bride and groom often balk at negotiating a prenuptial agreement since it appears to envisage a breakup of the marriage even before it begins .
furthermore , a key court case earlier this year affirmed widespread views that a buyer can ' t easily walk away from a merger . in that case , meat - processing concern tyson foods inc . sought to cancel a planned acquisition of meat - packer ibp inc . due to a drop in ibp ' s earnings and a write - down of an ibp subsidiary . but a delaware judge refused to let tyson cancel the pact , saying tyson had been aware of the cyclical nature of ibp ' s business and the accounting issue .
in a lengthy june 18 opinion , delaware chancery court vice chancellor leo e . strine jr . wrote that " . . . the important thing is whether the company has suffered a material adverse effect in its business or results of operations that is consequential to the company ' s earnings power over a commercially reasonable period , which one would think would be measured in years rather than months . "
that interpretation has created ripples in the deal - making community , prompting some transactions to include more details about circumstances under which deals can be terminated . since the sept . 11 attacks , for example , a handful of merger agreements have specified that future terrorist activity would qualify as a " material adverse change , " or mac .
a key issue for any firm alleging there has been a material adverse change is " whether the new facts go to the guts of the strategic opportunity or is it just a hiccup , " says meredith brown , co - chairman of the mergers and acquisitions group at law firm debevoise & plimpton in new york . he adds that a court " may be skeptical " if dynegy claimed that enron ' s post - merger agreement disclosures were a surprise .
the enron - dynegy merger agreement includes several triggers permitting either side to seek termination . enron can quit the deal if it receives a substantially better offer , although it is prohibited from soliciting one . in such a case , it could be required to pay a $ 350 million " topper fee " to dynegy and its co - investor , chevrontexaco inc .
dynegy can alter the deal if enron faces " pending or threatened " litigation liabilities that are " reasonably likely " to cost enron $ 2 billion . if those liabilities hit $ 3 . 5 billion " an enron material event will be deemed to have occurred , " presumably allowing dynegy to call the whole thing off . in some situations , dynegy would be liable for a $ 350 million fee , as well .
karen denne , the enron spokeswoman , said her firm doesn ' t believe that losses arising from the normal course of business would qualify as a material event . the liability must result from litigation . currently , the company faces more than a dozen shareholder suits alleging breach of fiduciary duty by officers and directors , issuing false and misleading reports and other offenses .
deal makers who aren ' t involved in the combination say the steep drop in enron ' s stock price since the merger agreement was signed wouldn ' t by itself give dynegy the ability to cancel the pact or force enron to renegotiate its terms . instead , they say , dynegy would likely have to prove that enron ' s worsening financial condition was an unanticipated event , which could be difficult in light of the company ' s highly publicized problems and dynegy ' s frequent statement that it clearly understands enron ' s businesses . still , there is another standard clause in the merger document that would allow dynegy to terminate the deal if " any representation or warranty of enron shall have become untrue . "
other energy companies have abandoned deals following a widening gap in stock prices that changed an acquisition premium . western resources inc . of topeka , kansas last week sued public service co . of new mexico seeking hundreds of millions of dollars in damages after it failed to buy western ' s utilities . the lawsuit accused public service of breaching its " duty of good faith and fair dealing " and said the new mexico company tried to " sabotage " the deal as the two companies ' stock prices diverged . public service denies the accusations .
copyright ? 2000 dow jones & company , inc . all rights reserved .
options report
volatility fell slightly in light holiday trading as enron calls , lilly puts attracted interest
by cheryl winokur munk
dow jones newswires
11 / 26 / 2001
the wall street journal
b 8
( copyright ( c ) 2001 , dow jones & company , inc . )
new york - - the options market dozed , as many participants stayed home to recover from too much turkey and football .
the chicago board options exchange ' s market volatility index , or vix , which measures certain standard a fall shows investor optimism .
volatility has been dropping from post - sept . 11 levels in recent weeks amid victories over the taliban in afghanistan and interest - rate cuts by the federal reserve and other central banks . vix ranged between 30 and 40 for several weeks following the attacks .
volatility is likely to remain low , said mika toikka , head of options strategy at credit suisse first boston . " typically , going into the thanksgiving and december holidays , we tend to experience a seasonal drift lower in implied volatility . we would expect the same this year , especially in markets outside the u . s . where volatility is still lingering at high levels , " mr . toikka wrote in a recent research note .
the cboe ' s nasdaq volatility index , or vxn , a sentiment barometer for the technology sector , fell 1 . 86 to 50 . 82 while the american stock exchange ' s nasdaq volatility index , or qqv , dropped 1 . 03 to 42 . 74 .
elsewhere in the options market :
calls in enron corp . , the embattled houston energy and trading company , continued to trade briskly , with one investor buying 10 , 000 january 5 calls and simultaneously selling 12 , 250 january 10 calls .
more than 14 , 800 of the january 5 contracts traded , compared with open interest of 3 , 640 , as shares fell 33 cents , or 6 . 6 % , to $ 4 . 68 . these calls cost $ 1 . 40 on the american stock exchange where most of the volume was traded .
more than 15 , 000 of the january 10 contracts traded , compared with open interest of 30 , 674 . these out - of - the - money calls cost 30 cents on the amex .
eli lilly & co . ' s december 80 out - of - the - money puts also were popular friday , as shares fell 91 cents , or 1 . 1 % , to $ 82 . 42 . morgan stanley cut its rating on the company to neutral from outperform , saying the stock has become too expensive even with food and drug administration approval of its potential blockbuster drug xigris , which treats septic infections . more than 3 , 000 of these puts traded , compared with open interest of 6 , 427 . they cost $ 1 . 25 on the cboe , which saw much of the volume .
copyright ? 2000 dow jones & company , inc . all rights reserved .
the corporation : acquisitions
the other instant powerhouse in energy trading
by louise lee in san mateo , calif .
11 / 26 / 2001
businessweek
96
( copyright 2001 mcgraw - hill , inc . )
it ' s not easy being no . 4 . despite a $ 35 billion merger completed in october , chevrontexaco corp . is still not one of the oil superpowers . nor , at more than $ 90 billion a year in revenues , is it a scrappy little guy . so chairman david j . o ' reilly has been searching for a strategy beyond just drilling for more oil and gas .
now , he may have something : a big stake in the no . 1 energy - trading company . chevron corp . has owned 26 % of dynegy inc . since 1996 , and with dynegy ' s planned acquisition of enron corp . , the top energy trader , chevrontexaco is making the oil industry ' s most aggressive push yet into this fast - growing business . it plans to eventually pump $ 2 . 5 billion into the combined dynegy and enron to maintain its 26 % stake , and it might raise that share . so , while chevrontexaco ' s much bigger rivals run small in - house trading operations , energy trading may soon account for more than 10 % of chevrontexaco ' s earnings . ` ` chevron is now positioned to be a leader in the business , ' ' says analyst arjun murti at goldman , sachs the most likely target is a natural - gas company . maybe it ' s not so bad being no . 4 .
illustration : chart : chevron ' s growing cash hoard
copyright ? 2000 dow jones & company , inc . all rights reserved .
the corporation : acquisitions
all eyes on the enron prize if the deal holds , dynegy will walk away with some juicy assets
by stephanie anderson forest , with wendy zellner in dallas , and peter coy and emily thornton in new york
11 / 26 / 2001
businessweek
94
( copyright 2001 mcgraw - hill , inc . )
as houston - based enron corp . imploded amid a dizzying scandal over its finances , few would have blamed dynegy inc . ceo charles l . watson if he had sat back and gloated . after all , watson had watched as his bigger , brasher crosstown rival sniffed at dynegy ' s more cautious strategy , all the while garnering most of the credit for reshaping the energy - trading business .
instead , watson picked up the phone on oct . 24 and called enron chairman , ceo , and longtime acquaintance kenneth l . lay to ask how he could help . lay didn ' t respond immediately , but as enron ' s stock continued to plunge and the company faced a cash squeeze , it became clear what the only realistic answer could be : bail us out .
so two days later , lay invited watson to his river oaks home near downtown houston for breakfast to discuss a deal . over muffins and ` ` a bad cup of coffee ' ' the next day , watson recalls , they sketched the outlines , and by 10 p . m . that night , the investment bankers were called in . on nov . 9 , dynegy announced that it would pay about $ 10 billion , plus the assumption of $ 13 billion in debt , to buy enron , which is nearly four times its size . the key to the deal was dynegy ' s immediate $ 1 . 5 billion infusion of cash to shore up enron ' s balance sheet and save its credit rating . the money came from dynegy ' s 26 % owner , chevrontexaco corp .
without that help , enron - - the seventh - largest u . s . company , based on its $ 100 billion in sales last year - - may well have faced bankruptcy . watson says that he never would have imagined such an outcome in his wildest dreams . ` ` i don ' t think anybody foresaw the problems [ at enron ] , ' ' he says . ` ` it ' s been incredible to watch . ' '
watson , 51 , has to make good on what may well be his riskiest investment yet . if he can pull it off , the new dynegy will have revenues of more than $ 200 billion and $ 90 billion in assets , including more than 22 , 000 megawatts of power - generating capacity and 25 , 000 miles of pipeline . it would control an estimated 20 % to 25 % of the energy - trading market , up from about 6 % now .
that would be sweet vindication for watson ' s strategy . dynegy backs trading operations with hard assets such as power plants , which allows the company to guarantee a supply of electricity to a buyer . in contrast , enron has worked furiously to shed power plants and oil - and gas - generating fields , believing it could earn higher returns using its trading and technology expertise to tap assets owned by others in markets including steel , pulp , and paper . irresistible bargain . as enron ' s stock slid below $ 9 from its august , 2000 , high of $ 90 , it became a bargain that watson couldn ' t pass up . it would have taken years for dynegy to build up a market - making operation to match enron ' s . its risk - management systems are top - of - the - line . enron ' s commercial - services unit , which manages power supplies for corporate customers such as wendy ' s international inc . , is three or four years ahead of dynegy ' s , says steve bergstrom , president of dynegy . watson says he still plans to get rid of the $ 8 billion worth of assets lay had earmarked for sale , including the portland ( ore . ) general electric plant and oil and gas assets in india . for the $ 1 . 5 billion , though , if the deal falls through dynegy will have the right to enron ' s prized northern natural gas pipeline , worth an estimated $ 2 . 25 billion . and dynegy can walk away if enron ' s legal liabilities exceed $ 3 . 5 billion .
watson firmly believes that enron suffered from a crisis of confidence , not a meltdown of its core business . indeed , enron ' s wholesale - trading operation earned $ 2 . 3 billion last year . says watson : ` ` we know the business . we looked under the hood , and guess what ? it ' s just as strong as we thought it was . ' '
but the trading profits were obscured in recent weeks by enron ' s accounting tricks . the biggest danger for watson is that there are other time bombs ticking away . already , the company has slashed its reported earnings since 1997 by $ 591 million , or 20 % of its total , to account for controversial partnerships involving enron officials . the securities some compare it to a fraternity . dynegy ' s decision to issue new stock options to some enron employees may soothe battered egos . it should help , too , that lay decided not to take the $ 60 million golden parachute he could have received in a buyout . as it is , lay will not have a management job with the new company .
dynegy often seemed to be an enron wannabe , following it into online trading and commercial services . still , dynegy ' s 361 % stock gains last year eclipsed enron ' s 87 % rise , and it rankled some that lay ' s execs got more credit . ` ` chuck watson may not have been in the spotlight , but he has always been at the forefront of this business , ' ' says bruce m . withers , who sold his trident ngl inc . to dynegy in 1995 . watson will get more attention next year - - he ' s a 15 % owner of the new houston texans pro football team . but with his bold takeover of enron , watson has ensured that he ' s off the sidelines for good .
photograph : dynegy ' s watson he says enron ' s core business is strong . but others worry that more accounting tricks will turn up photograph by najlah feanny / corbis saba illustration : chart : powering up at dynegy chart by laurel daunis - allen / bw
copyright ? 2000 dow jones & company , inc . all rights reserved .
cover story
confused about earnings ? you ' re not alone . here ' s what companies should do - - and what investors need to know
by nanette byrnes and david henry
with mike mcnamee in washington
11 / 26 / 2001
businessweek
76
( copyright 2001 mcgraw - hill , inc . )
in an age when giant earnings write - offs have become commonplace , it ' s hard to shock wall street . but on nov . 8 , enron corp . managed to do it . after years of high - octane growth that had seen earnings surge by up to 24 % a year , the houston - based energy company acknowledged that results for the past three years were actually overstated by more than a half - billion dollars . it was confirmation of investors ' worst fears . three weeks earlier , enron had announced a big drop in shareholders ' equity , sparking fears that its hideously complex financial statements were distorting its true performance . management pointed to a number of factors , including a dubious decision to exclude the results of three partnerships from its financial statements and a billion - dollar error several years earlier that had inflated the company ' s net worth .
enron may be an extreme example of a company whose performance fell far short of the glowing picture painted by management in its earnings releases , but it is hardly alone . this year , corporate america is expected to charge off a record $ 125 billion , much of it for assets , investments , and inventory that aren ' t worth as much as management thought ( chart , page 79 ) . even if companies don ' t go back and restate earnings , as enron is doing , those charges cast doubt on the record - breaking earnings growth of the late ' 90 s .
not since the 1930 s has the quality of corporate earnings been such an issue - - and so difficult for investors to determine . there ' s more at stake than the fortunes of those who bought shares based on misleading numbers . if even the most sophisticated financial minds can ' t figure out what a company actually earns , that has implications far beyond enron . u . s . financial markets have a reputation for integrity that took decades to build . it has made the u . s . the gold standard for financial reporting and the preeminent place to invest . it has also ensured ready access to capital for u . s . corporations . that a company such as enron , a member of the standard & poor ' s 500 - stock index and one of the largest companies on the new york stock exchange , could fall so far so fast shows how badly that gold standard has been tarnished . ` ` the profession of auditing and accounting is , in fact , in crisis , ' ' says paul a . volcker , former chairman of the federal reserve and now one of the leaders of the international accounting standards board .
sometimes , as in the case of enron , fuzzy numbers result from questionable decisions in figuring net earnings . more often , though , the earnings chaos results from a disturbing trend among companies to calculate profits in their own idiosyncratic ways - - and an increasing willingness among investors and analysts to accept those nonstandard tallies , which appear under a variety of names , from ` ` pro forma ' ' to ` ` core . ' ' ( enron offers its own such version . before investors untangled the importance of enron ' s first announcement , its stock rose briefly because it told investors that its ` ` recurring net income ' ' had met expectations . ) the resulting murk makes it difficult to answer the most basic question in investing : what did my company earn ?
why calculate a second set of earnings in the first place ? because the numbers reached by applying generally accepted accounting principles ( gaap ) are woefully inadequate when it comes to giving investors a good sense of a company ' s prospects . many institutional investors , most wall street analysts , and even many accountants say gaap is irrelevant . ` ` i don ' t know anyone who uses gaap net income anymore for anything , ' ' says lehman brothers inc . accounting expert robert willens . the problem is that gaap includes a lot of noncash charges and one - time expenses . while investors need to be aware of those charges , they also need a number that pertains solely to the performance of ongoing operations .
that ' s what operating earnings are supposed to do . but because they ' re calculated in an ad hoc manner , with each company free to use its own rules , comparisons between companies have become meaningless . ` ` no investor - - certainly not any ordinary investor - - can read these in a way that ' s useful , ' ' says harvey l . pitt , chairman of the securities & exchange commission . the sec is examining whether new rules are needed to clarify financial reports and perhaps restrict use of pro formas .
what ' s badly needed is a set of rules for calculating operating earnings and a requirement to make clear how they relate to net income . in the end , investors need two numbers - - a standardized operating number and an audited net - income number - - and a clear explanation of how to get from one to the other . ` ` out of hand . ' ' a widespread consensus is building to do just that . in early november , s & p proposed a set of rules for companies to follow when tallying operating earnings . only the week before , the financial accounting standards board , the rulemakers for gaap , had announced that they , too , would be taking up this issue . volcker says the international accounting standards board is also seeking a uniform definition of operating earnings .
` ` over the past two or three years , the use of creative earnings measures has grown and grown and grown to the point where it has really gotten out of hand , ' ' says david m . blitzer , s & p ' s chief investment strategist . ` ` earnings are one of the key measures that anybody looks at when they ' re trying to evaluate a company . if people want to use an operating - earnings measure , we better all know what we ' re looking at . ' '
without those standards in place , the gap between earnings according to generally accepted accounting principles and earnings according to wall street is only going to grow wider and more confusing . look at the variance in earnings per share calculated for the s & p 500 for the third quarter : it ' s $ 10 . 78 according to wall street analysts as tallied by thomson financial / first call , $ 9 . 17 according to s & p , and $ 6 . 37 according to numbers reported to the sec under gaap . ( s & p , like businessweek , is owned by the mcgraw - hill companies . )
the lack of a standard measure can be costly to those who choose wrong . use first call ' s earnings for the past four quarters and you get a relatively modest price - earnings ratio of 23 for the s & p 500 . but run the numbers using gaap earnings , and suddenly the market has a far steeper p - e of 38 .
how did we get into this mess ? investors and analysts have been calculating operating earnings for years , and for years , reasonable people could more or less agree on how to do it . then came the dot - com bubble , along with increased pressure from wall street for companies to meet their quarterly earnings forecasts . suddenly , companies that hadn ' t turned a profit by any conventional measure started offering ever more inventive earnings variants . these customized pro forma calculations excluded a grab bag of expenses and allowed upstart companies to show a profit . ` ` tower of babel . ' ' pro forma formulas vary wildly from company to company and even from quarter to quarter within the same company , casting doubt on their validity . and these days , the gulf between net earnings and pro forma earnings is wider than ever . s & p ' s tallies fall between the two : s & p ' s numbers are more systematic than pro forma , but they aren ' t followed widely enough to be a standard . ` ` investors are facing a tower of babel , ' ' says robert k . elliott , former chief of the american institute of certified public accountants ( aicpa ) and a retired kpmg partner . ` ` it ' s not standardized , and the numbers are not audited . ' '
that makes it tough to evaluate a company ' s performance . in the quarter ended on sept . 30 , nortel networks corp . offered shareholders at least three earnings numbers to choose from . by conservative gaap accounting , the telecommunications giant lost $ 1 . 08 a share . the company also provided two possible pro forma options : a 68 cents loss that excluded ` ` special charges , ' ' including some acquisition costs and restructuring charges , and a still better 27 cents loss that further excluded $ 1 . 9 billion of ` ` incremental charges , ' ' such as writing down inventories and increasing provisions for receivables . wall street chose the rosiest one .
confusing ? you bet . companies defend their pro forma calculations by pointing out that they ' re merely filling a void : investors are clamoring for a measure that gives them better insight into their company ' s future . the goal is to get to the core of the business and try to measure the outlook for those operations . ` ` there are good reasons why there is an emphasis on operating earnings , ' ' says volcker . ` ` it is an effort to provide some continuity and some reflection of the underlying progress of the company . ' ' besides , as companies like to point out , they still have to report gaap earnings , and investors are free to ignore everything else .
there ' s no starker lesson in the shortcomings of gaap than the $ 50 billion asset write - downs by jds uniphase corp . , the biggest charge of the year . near the height of the telecom bull market in july , 2000 , the san jose ( calif . ) maker of fiber optics topped off a buying spree by acquiring competitor sdl inc . for $ 41 billion in stock . when the deal closed in february , its assets ballooned from $ 25 billion to $ 65 billion . but by then , shares of jds and other fiber - optics makers were collapsing . to bring its acquisitions into line with their new value , the company took charges of $ 50 billion . despite the fact that the bulk of its losses stemmed from stock transactions and involved no cash paid , gaap required that the charges be taken out of net income . so according to gaap , jds lost $ 56 billion in the fiscal year ending in june - - a staggering figure for a company whose revenues over the past five years added up to only $ 5 billion .
analysts and the company argue that besides not involving cash , the charge - off was all about the past , a right - sizing of values that had gotten out of hand . to analyze the company ' s prospects , they excluded the $ 50 billion charge . ` ` the accounting is not designed to make things look better but to describe what happened , ' ' says jds uniphase chief financial officer anthony r . muller , ` ` and we ' ll live with the consequences , whatever they are . ' ' analysts make a similar defense . ` ` my goal is to figure out what the business is going to produce so that we can value the company , ' ' says lehman brothers analyst arnab chanda . glacial pace . are jds ' s pro forma numbers realistic - - a fair gauge of jds ' s ongoing operations ? right now , it ' s hard for investors to judge . and that ' s the kind of ambiguity s & p and others would like to eliminate . in november , s & p circulated a memo on how to standardize operating earnings . under the proposal , operating earnings would include the costs of purchases , research and development , restructuring costs ( including severance ) , write - downs from ongoing operations , and the cost to the company of stock options . it would exclude merger - and - acquisition expenses , impairment of goodwill , litigation settlements , and the gain or loss on the sale of an asset .
when s & p applied roughly that formula to jds uniphase , it split the difference between wall street and gaap . because of differences in what each group included in their earnings calculations , the results were chaotic . using gaap , the company lost $ 9 . 39 a share . s & p figures it lost $ 3 . 19 , while the company put the loss at 36 cents . meanwhile , wall street says it made 2 cents .
the s & p standard may make sense , but it raises the question : where is the financial accounting standards board , the group in charge of gaap ? chairman edmund l . jenkins says fasb will be addressing the problems . still , investors shouldn ' t expect any improvement soon . the pace of change at fasb tends to be glacial . it typically takes four years to complete a new standard . in 1996 , for example , the board realized that standards on restructuring charges had some big loopholes and it resolved to put the issue on its agenda . in june , 2000 , the board finally issued a draft of a new standard , asked for comments , and held a public hearing . in october , 2001 , the board said it still wasn ' t ready to put a fix in place . now , the recession has set off another wave of restructuring charges , and the fasb still doesn ' t have new rules .
the slow pace means the standard - setters sometimes fail to react to sudden changes in the market . the most recent failure followed the terrorist attacks on september 11 . an fasb task force , unable to come up with a set of rules for separating september 11 costs from general expenses , instead told companies that the disaster could not be treated as an extraordinary item . so gaap earnings include costs stemming from the disaster as part of a company ' s general performance . many companies have nevertheless broken those costs out in their unaudited press releases .
many more are likely to do so in the fourth quarter . indeed , 2001 is shaping up to be one for the record books . a poor economy and the devastating aftereffects of september 11 have resulted in a slew of unusual charges that are unlikely to recur and that no one could have foreseen . but there ' s a growing concern that the earnings fog is providing managers with cover to hide missteps of the past within that vast category of supposedly one - time charges . the temptation will be to take as big a charge as possible now , while investors are braced for bad news . not only can managers sweep away yesterday ' s errors , but tomorrow ' s earnings will look even better .
the basic question comes down to what constitutes a special expense - - a charge so unusual that to include it in the earnings calculation would be to distort the truth about a company ' s performance . usually , big charges fall into a few categories , including charges for laying off workers and restructuring a company , charges for assets that have lost value since they were purchased , charges for investments that have lost value , and charges for inventory that has become obsolete . in a recent study , harvard business school professor mark t . bradshaw found that companies are increasingly calling these charges unusual . that gives them a rationale for excluding them from their pro forma calculations .
lots of critics disagree , saying such charges are often an inevitable part of the business cycle and should be reflected in a company ' s earnings history . they certainly should not be ignored by investors . ` ` charges are real shareholder wealth that ' s been lost , ' ' argues david w . tice , manager of the prudent bear fund , a mutual fund with a pessimistic bent that ' s up 17 % so far this year . ` ` it ' s money they spent on something no longer worth what it was , a correction of past earnings , or a reserve for costs moving forward . whatever the reason , it ' s a real cost to the company , and that hurts shareholders . ' ' without standards , excessive write - offs from operating earnings can obscure actual performance . without any rules , companies calculate operating earnings inconsistently in order to put their companies in the best possible light . dell computer corp . is a good example of this ` ` heads i win , tails you lose ' ' school of accounting . for years , dell benefited from gains in its venture - capital investments and was happy to include those gains in its reported earnings , where they appeared as a separate line on the income statement . but this year , when those gains turned to losses , the computer maker issued pro forma numbers that excluded that $ 260 million drag . dell spokesman michael maher says the company ' s press releases and sec filings break out investment income and give gaap numbers as well as pro forma . ` ` in our view , the numbers are reported clearly , ' ' says maher . ` ` it ' s all out there for the consuming public . ' ' past puffery . many experts believe special charges are a sign that past performance was exaggerated . what should investors make of a company such as gateway inc . ? two restructuring charges in the first and third quarters , minus a small extraordinary gain , totaled $ 1 . 12 billion , or about $ 100 million more than the company made in 1998 , 1999 , and 2000 combined . which is the truer picture of its performance and potential ? the write - offs or the earnings ? write - offs for customer financing are another example . when nortel increased its reserves for credit extended to customers by $ 767 million in september , it effectively admitted it had booked sales in the past to companies that couldn ' t pay - - in effect overstating its performance in those earlier periods . in addition , nortel says booking sales and accounting for credit are unrelated issues . tech companies blame the sharp downturn in their industry for the big write - offs . and these aren ' t isolated examples . peter l . bernstein , publisher of newsletter economics & portfolio strategy , found that from 1989 to 1993 , 20 % of earnings vanished into write - offs .
big charge - offs can also distort future performance . critics contend that excess reserves are often used as a sort of ` ` cookie jar ' ' from which earnings can be taken in future quarters to meet wall street ' s expectations . or charges taken this year , for example , which is apt to be a lousy one for most companies anyway , might include costs that would otherwise have been taken in future periods . prepaying those costs gives a big boost to later earnings . rules for figuring operating earnings would help , but this is an area that will always involve a certain amount of judgment - - and therefore invite a certain amount of abuse . ` ` people are going to write off everything they can in the next two quarters because they ' re having a bad year anyway , ' ' says robert g . atkins , a mercer management consultant .
part of the lure of big special charges is that investors tend to shrug them off , believing that with the bad news out in the open , the company is poised for a brighter future . since gateway detailed its third - quarter charge of $ 571 million on oct . 18 , wall street has bid the stock up 48 % , compared with a 6 % runup for the s & p 500 .
often , though , investors should take exactly the opposite message . if , for example , part of a restructuring involves slashing employee training , information - technology spending , or research and development , the cuts could depress future performance , says baruch lev , a professor of accounting at the stern school of business at new york university . ` ` are these really one - time events ? ' ' he asks . ` ` or is this the beginning of an avalanche ? ' ' indeed , morgan stanley dean witter & co . strategist steve galbraith has found that in the year following a big charge - off to earnings companies have underperformed the stock market by 20 percentage points . ` ` la la land . ' ' investors are apt to be faced with more huge write - offs next year , even if the economy doesn ' t continue to worsen . why ? the transition to a new gaap rule that changes the way companies account for goodwill - - a balance - sheet asset that reflects the amount paid for an acquisition over the net value of the tangible assets . under the new rule , companies will have to assess their properties periodically and decrease their worth on the balance sheet if their value falls . an informal survey by financial executives international of its member controllers and financial officers found that at least a third expect to take more charges .
but figuring out the proper value of those assets is no easy task . unless there is a comparable company or factory with an established market price , valuing them involves a lot of guesswork for which there are no firm rules . ` ` what this is really coming down to is corporations and their auditors coming up with their own tests for impairment , ' ' says the stern school ' s professor paul r . brown . ` ` it ' s la la land . ' '
while the tidal wave of special charges is providing cover for earnings games , it could also be an impetus for change - - especially in the wake of the dot - com fiasco . indeed , there are some signs of a backlash . the real estate investment trust industry was a pioneer of engineered earnings , with its ` ` funds from operations , ' ' or ffo . but now some reits have begun to revert to plain old gaap earnings . hamid r . moghadam , ceo of san francisco - based amb property corp . , shifted back to gaap in 1999 . ` ` the reason i don ' t like ffo is very simple , ' ' says moghadam . ` ` one company ' s numbers look better than another one ' s even if they had identical fundamental results . ' '
there are other steps fasb could take to improve financial reporting and restore gaap ' s status . trevor s . harris , an accounting expert at morgan stanley , says it could force companies to make clear distinctions between income from operations and income from financial transactions . lehman ' s willens says companies should provide more information on cash expenses and how they bear on earnings . an easy step would be to require companies to file their press releases with the sec .
at the least , says lev , companies must clearly explain how their pro forma numbers relate to the gaap numbers . otherwise , he says , investors ` ` see numbers floating there , and where did they come from ? ' ' in today ' s environment of unregulated pro forma calculations and supersize write - offs , no question is more important to investors .
high - gloss glossary
companies are using a variety of accounting practices to put the best spin on
their results . here ' s what those terms mean :
defining earnings :
net income
the bottom line , according to generally accepted accounting principles ( gaap ) .
sometimes called ` ` reported earnings , ' ' these are the numbers the securities &
exchange commission accepts in its filings .
operating earnings
an adjustment of net income that excludes certain costs deemed to be unrelated
to the ongoing business . although it sounds deceptively like a gaap figure
called ` ` operating income ' ' ( revenue minus the costs of doing business ) , it is
not an audited figure .
core earnings
another term for operating earnings . neither core nor operating earnings are
calculated according to set rules . they can include or exclude anything the
preparer wishes .
pro forma earnings
the 1990 s term for operating earnings . popularized by dot - coms , it sometimes
excludes such basic costs as marketing and interest .
ebitda
earnings before interest , taxes , depreciation , and amortization . the
granddaddy of pro forma , it was initially highlighted by industries that
carried high debt loads , such as cable tv , but has since come to be widely
quoted .
adjusted earnings
a new term for pro forma .
defining costs :
special charges
a general term for anything a company wants to highlight as unusual and
therefore to be excluded from future earnings projections .
asset impairments
charges taken to bring something a company paid a high price for down to its
current market value . many companies are now taking these charges on internal
venture - capital funds that bought internet and other high - tech stocks at
inflated prices .
goodwill impairments
the same idea as asset impairments except they ' re used to write down the
premium a company paid over the fair market value of the net tangible assets
acquired . these charges will explode in the first quarter of 2002 because of a
change in mergers - and - acquisitions accounting that eliminates goodwill
amortization and requires holdings to be carried at no more than fair values .
restructuring reserves
an accrued expense ( not usually cash ) to cover future costs of closing down a
portion of a business , a plant , or of firings . these are projected costs and
if overstated can later become a boost to earnings as they are reversed .
write - down
lowering the value of an asset , such as a plant or stock investment . it is
often excused as a bookkeeping exercise , but there may have been a real cost
long ago that now proves ill spent , or there may have been associated cash
costs , such as investment - banking fees .
illustration : chart : the big bath chart by eric hoffmann / bw
illustration : chart : earnings chaos chart by eric hoffmann / bw
copyright ? 2000 dow jones & company , inc . all rights reserved .
editorials
end the numbers game
11 / 26 / 2001
businessweek
130
( copyright 2001 mcgraw - hill , inc . )
what did the company earn ? that ' s the most basic question an investor can ever ask . the equity culture that has generated so much growth over the years depends on a clear answer , but getting one has become impossible . enron corp . just announced that its earnings for the past three years were overstated by half a billion dollars . how did one of the biggest companies on the new york stock exchange manage to inflate its earnings by 20 % without auditors , analysts , ratings agencies , and the business press ( businessweek included ) discovering it ? in part , blame the breakdown of standardized accounting rules and the anarchy that runs rampant in the financial statements of corporate america . the u . s . needs a new set of accounting rules that gives a clear picture of financial performance . without integrity in financial reporting , the u . s . cannot hope to remain the preeminent place to invest in the global marketplace ( page 76 ) .
the dot - com bubble was the first indication that there was something seriously wrong with accounting standards . companies without much of a business model customized their quarterly statements to exclude a grab bag of expenses in order to put a positive financial spin on their operations . wall street conspired in this and encouraged big companies to join in . soon , the method of calculating earnings began to vary from company to company and even from quarter to quarter within a company . it is now chaos .
a stricter adherence to accounting rules won ' t solve the entire problem . gaap , the generally accepted accounting principles , allow all kinds of one - time expenses and noncash charges . this obscures the performance of ongoing operations . no one can fathom what are true operating earnings because there are no guidelines as to what constitutes an extraordinary expense . the result is total confusion . take earnings per share for the standard & poor ' s 500 - stock index for the second quarter . under thomson financial / first call standards , it is $ 11 . 82 . but it ' s $ 9 . 02 according to s & p and $ 4 . 83 under gaap . how can investors make intelligent decisions ?
the financial accounting standards board clearly is failing to do its job . it has promised to write a set of rules that calculates operating earnings and relates them to net earnings , but it hasn ' t delivered . the rating agency standard & poor ' s ( owned by the mcgraw - hill companies , as is businessweek ) is doing a better job . it recently drew up a definition of ` ` operating earnings ' ' that includes restructuring costs ( including severance ) , writedowns from ongoing operations , and the cost of stock options . it excludes merger and acquisition expenses , litigation settlements , impairment of goodwill , and gains or losses on asset sales . this is a beginning that fasb should build on . the accounting anarchy has to end .
copyright ? 2000 dow jones & company , inc . all rights reserved .
up front : afterlives
free and clear of enron ' s woes
edited by sheridan prasso
by stephanie anderson forest
11 / 26 / 2001
businessweek
16
( copyright 2001 mcgraw - hill , inc . )
back in enron ' s heyday , one of its rising stars was rebecca mark . nicknamed ` ` mark the shark ' ' because of her ferocious ambition , she made her name in the early ' 90 s building the energy giant ' s international operations , including the now - troubled dabhol power plant in india . once rumored to be a successor to enron ceo ken lay , she resigned from enron in august , 2000 , after two years of heading enron ' s ailing water company spin - off , azurix .
these days , as enron struggles to stay afloat , mark - jusbasche ( who hyphenated her name with that of her husband of two years ) is watching the action from the sidelines . and she ' d like to keep it that way . ` ` i ' m very surprised and saddened by [ what has happened at enron ] , and i wish them all the best , ' ' she says . beyond that , mark - jusbasche , 47 , is not much interested in talking about enron , which is being acquired by a small rival after a spectacular wall street flameout . mark left enron with millions of dollars worth of enron shares , although she says she has sold them since .
mark - jusbasche spends most of her time serving on advisory boards , both at yale and harvard business schools , as well as the school where her 16 - year - old twin sons from a previous marriage are sophomores .
in her spare time , she seeks out opportunities for investing . currently , mark - jusbasche is considering alternative - energy and water - technology companies . a farm girl from missouri , she has one investment focus that ' s especially dear to her heart : looking into expanding her cattle ranches . she now owns 15 acres in new mexico . ` ` i ' m doing things that are fun , interesting , and important to me - - family and community , ' ' she says . sure beats being anywhere near enron .
photograph : mark : now just a bystander photograph by brett coomer / ap / wide world
copyright ? 2000 dow jones & company , inc . all rights reserved .
companies & finance international - enron still optimistic of averting financial meltdown .
by andrew hill and sheila mcnulty .
11 / 26 / 2001
financial times
( c ) 2001 financial times limited . all rights reserved
enron said yesterday it was still expecting outside investors to inject $ 500 m to $ 1 bn into the group , as talks continued to avoid a financial meltdown at the energy trading group .
dynegy , whose rescue bid for its houston rival is crucial to enron ' s survival , spent last week ' s thanksgiving holiday and the weekend reviewing enron ' s operations and finances .
dynegy said it remained " optimistic for the potential of the merger to be completed , and in the time - frame we originally announced - six to nine months " .
enron ' s fate depends on a delicate , unofficial pact between its lenders , dynegy , and credit ratings agencies , which have resisted downgrading the group ' s debt while the deal is pending .
if the pact stays in place , at least $ 500 m is likely to be invested in enron by jp morgan chase and citigroup , enron ' s key lenders and advisers . a further $ 500 m is being sought from private equity firms .
but if dynegy pulls out of the deal , the cash infusion could be put in jeopardy and the ratings agencies could downgrade the debt to junk , triggering debt repayments across a network of partnerships and off - balance - sheet vehicles linked to enron .
enron confirmed yesterday that it was still seeking additional liquidity from new equity investors , but would not discuss their identities .
enron ' s crisis of confidence became more acute last week when the shares fell from $ 9 to $ 4 . 74 following a regulatory filing that revealed the extent of the group ' s debt burden .
completion of a $ 1 bn secured credit line from jpm chase and citigroup , and the postponement of a $ 690 m notes repayment due tomorrow were not sufficient to prop up the share price . the bonds also fell to levels consistent with a potential bankruptcy filing .
the slide in the share price has encouraged speculation that dynegy is preparing to renegotiate its all - stock bid , now worth $ 9 . 3 bn , compared with enron ' s market value of $ 3 . 5 bn .
but people close to enron say renegotiation of the deal would not in itself have any impact on the energy group ' s finances . latest news , www . ft . com / enron .
( c ) copyright financial times ltd . all rights reserved .
http : / / www . ft . com .
copyright ? 2000 dow jones & company , inc . all rights reserved .
schwab chief ' s main theme : diversification
by lynnette khalfani
dow jones newswires
11 / 26 / 2001
the wall street journal
( copyright ( c ) 2001 , dow jones & company , inc . )
new york - - more than two months after the sept . 11 terrorist attacks , many investors remain edgy . but the stock market , after an initial selloff , has shown remarkable resilience .
few observers expect stock - market volatility to subside soon . still , experts say that now , more than ever , is the time for skittish investors to keep their wits about them .
in a recent interview , charles r . schwab , chairman and co - chief executive of charles schwab & co . , the san francisco - based online and discount brokerage firm , gave his views on what investors should be doing - - and what mistakes they should avoid .
here are some excerpts from the interview :
in the wake of the sept . 11 attacks , how much more risk , if any , do you think is in the financial markets ? or do you think it ' s just that people ' s perceptions about risk have changed ?
i ' ve been investing since 1959 , and i have to say that , year after year , the risk hasn ' t changed . the risk is always there . there ' s risk in investing in stocks , bonds and even u . s . treasuries because of interest - rate [ fluctuations ] . there ' s risk in real estate , too .
so the question is : how do you handle it ? the best way is to diversify . over a long period of time , people who diversify their investments do pretty darned well . when they don ' t . . . sometimes it ' s fatal . if the only stock an investor owned was enron . . . or cisco at 70 , that was pretty fatal .
what do you say to people who say they ' re too scared to invest right now ? that because of the threat of terrorism , the anthrax scares , the war in afghanistan , the recession , and so forth , there ' s just too much uncertainty in the markets ?
i remember back during the cuban missile crisis , we all feared the worst . we were all building bomb shelters . it was a scary time . this terrorist thing is no different . it ' s awful - - particularly for our children . but this country is so wealthy , in terms of its resources , intellectual capital and the strength of our government .
there is no more uncertainty today than in times past . for example , we ' ve had many recessions . it ' s not fun , especially when you begin reading about all these layoffs . in fact , i think the unemployment rate [ now at 5 . 4 % ] pretty easily might get to 6 . 5 % before it gets better . and it probably won ' t get better until march or april . also , the stock market will go up , hopefully before the economy goes up .
there ' s $ 2 trillion sitting in money - market accounts . that ' s a huge resource and buying power that ' s definitely available for new investments .
what do you think is the biggest mistake investors have made over the past two or so months ?
they let their emotions take over . with the fear that people had , they didn ' t use their rational thinking . they used their emotional thinking . [ after sept . 11 ] , they sold at the low , and fear was the driver .
just a year and a half ago , the driving emotion was greed . you ' re not going to avoid this stuff . so the issue is how you manage through these cycles of fear and greed . even when i ' m fearful of something , i say to myself : " this is still the time to invest . "
my biggest worry right now is that people will give up and say , " i just don ' t want to be in the stock market at all . " and it ' s just the time that people should be hanging on and keeping a diversified portfolio .
some other mistakes : a lot of people hang on to the stock that was the poster child of the last cycle . or people say , " i ' ll get back in [ the market ] when i see the economy turn around . " well , by the time they see that , it ' s too late . they will have missed the whole ride back up .
copyright ? 2000 dow jones financial desk
enron pursuing a cash infusion energy : company is seeking as much as $ 1 billion as it tries to shore up its endangered acquisition by dynegy .
from bloomberg news
11 / 26 / 2001
los angeles times
home edition
c - 2
copyright 2001 / the times mirror company
houston - - enron corp . said talks are continuing with potential investors for an infusion of as much as $ 1 billion as the biggest energy trader tries to avoid a collapse of its planned purchase by dynegy inc .
an investment would ease concern that enron ' s weakened finances may prompt dynegy to pull out of or renegotiate the terms of the transaction , which is valued at $ 23 billion in stock and assumed debt .
enron is seeking an additional $ 500 million to $ 1 billion in cash but wouldn ' t divulge details . " we are not going to discuss the particulars of who we are talking to , " enron spokeswoman karen denne said sunday .
shares of the houston company fell by 48 % in the last three trading sessions on the new york stock exchange . at friday ' s closing price of $ 4 . 71 , the stock sells for less than half the $ 10 . 85 that dynegy is slated to pay in the acquisition . that ' s a sign investors are skeptical the transaction will go through as planned .
enron is likely to have approached kohlberg , kravis roberts & co . , blackstone group and carlyle group for a private equity investment , said industry analyst david snow of . net .
the firms have declined to comment .
in a conference call nov . 14 , enron chief financial officer jeffrey mcmahon said the company is in talks with several private investors and expects to receive $ 500 million to $ 1 billion from those sources .
on wednesday , enron got a three - week reprieve from lenders on a $ 690 - million note due this week , gaining more time to restructure its finances . dynegy chief executive chuck watson said he was " encouraged " by the commitment to extend the note payment as well as the closing of a $ 450 - million credit facility . he said dynegy remained committed to the purchase .
enron already received $ 1 . 5 billion in cash nov . 13 from chevrontexaco inc . as part of the dynegy buyout agreement . in return , dynegy received preferred stock and other rights in an enron unit that owns the northern natural gas co . pipeline . under the deal ' s terms , if dynegy and enron fail to merge , dynegy can acquire the pipeline company .
but barron ' s reported over the weekend that dynegy ' s right to the pipeline might be challenged by j . p . morgan chase & co . and salomon smith barney inc . , which accepted the asset as collateral for $ 1 billion in loans to enron .
dynegy spokesman john sousa declined to comment on enron ' s attempts to secure financing or whether more cash for enron is a condition of keeping the merger alive .
enron ' s dealings with affiliated partnerships have led to a federal investigation of the company , which restated its earnings and saw its credit ratings cut .
the company said in a securities and exchange filing a week ago that it has less than $ 2 billion in cash and credit lines left .
copyright ? 2000 dow jones & company , inc . all rights reserved .
dynegy optimistic that enron merger will succeed - ft
11 / 26 / 2001
dow jones international news
( copyright ( c ) 2001 , dow jones + 44 - ( 0 ) 20 - 7842 - 9345 ; sarah . spikes @ dowjones . com
copyright ? 2000 dow jones & company , inc . all rights reserved .
dynegy purchase prompts antitrust concerns , l . a . times says
2001 - 11 - 26 07 : 36 ( new york )
washington , nov . 26 ( bloomberg ) - - california attorney
general bill lockyer is examining dynegy inc . ' s proposed
acquisition of rival energy seller enron corp . for possible
antitrust violations , the los angeles times reported .
the california independent system operator , which manages the
state ' s electric grid , has asked federal regulators to ban dynegy
and other major power sellers , including mirant , and aes corp . ' s
williams cos . , from selling electricity at market prices in the
state , the times said .
throughout the state ' s power crisis , governor gray davis and
other officials accused dynegy , enron and other power companies of
withholding electricity and manipulating the cost of wholesale
power to gouge consumers , the times said .
enron is negotiating with bankers to restructure $ 9 . 15
billion in debt .
` ` i would hope that the people who look at the antitrust
implications would consider this one carefully , ' ' california state
senator steve peace , a democrat , told the times . ` ` if anything ,
dynegy would be in an even stronger position to be able to
manipulate markets than it was before . ' '
financial post : news
enron hopes for infusion of capital : seeks us $ 500 m as talks of dynegy merger continue
andrew hill and sheila mcnulty
financial times
11 / 26 / 2001
national post
national
fp 3
( c ) national post 2001 . all rights reserved .
enron corp . said yesterday it was still expecting outside investors to inject us $ 500 - million to us $ 1 - billion into the group , as talks continued to avoid a financial meltdown at the energy trading group .
dynegy inc . , whose rescue bid for its houston - based rival is crucial to enron ' s survival , spent last week ' s u . s . thanksgiving holiday and the weekend reviewing enron ' s operations and finances .
dynegy said it remained " optimistic for the potential of the merger to be completed , and in the time - frame we originally announced - - six to nine months . "
enron ' s fate depends on a delicate , unofficial pact between its lenders , dynegy , and credit ratings agencies , which have resisted downgrading the group ' s debt while the deal is pending .
if the pact stays in place , at least us $ 500 - million is likely to be invested in enron by jp morgan chase and citigroup , enron ' s key lenders and advisers . a further us $ 500 - million is being sought from private equity firms .
but if dynegy pulls out of the deal , the cash infusion could be put in jeopardy and the ratings agencies could downgrade the debt to junk , triggering debt repayments across a network of partnerships and off - balance - sheet vehicles linked to enron .
enron confirmed yesterday it was still seeking additional liquidity from new equity investors , but would not discuss their identities .
enron ' s crisis of confidence became more acute last week when the shares fell to us $ 4 . 74 from us $ 9 after a regulator filing that revealed the extent of the group ' s debt burden .
completion of a us $ 1 - billion secured credit line from jpm chase and citigroup , and the postponement of a us $ 690 - million notes repayment due tomorrow , were not sufficient to prop up the share price . the bonds also fell to levels consistent with a potential bankruptcy filing .
the slide in the share price has encouraged speculation dynegy is preparing to renegotiate its all - stock bid , now worth us $ 9 . 3 - billion , compared with enron ' s market value of us $ 3 . 5 - billion .
but people close to enron say renegotiation of the deal would not in itself have any impact on the energy group ' s finances .
copyright ? 2000 dow jones & company , inc . all rights reserved .
india ' s aditya birla not eyeing enron ' s stake in dabhol
11 / 26 / 2001
dow jones international news
( copyright ( c ) 2001 , dow jones dow jones newswires ; 91 - 11 - 461 - 9426 ; himendra . kumar @ dowjones . com
copyright ? 2000 dow jones & company , inc . all rights reserved .
the enron scandal
a v rajwade
11 / 26 / 2001
business standard
10
copyright ( c ) business standard
enron has always been recognised by other companies as best practice in risk management . it put in systems to manage risks on a real - time basis and had very strong management . " james lam , founder of erisk , a consulting firm .
as an occasional teacher and more regularly a student of the subject of management of price risks , i have been an admirer of enron ' s elaborate disclosure of its risk management practices . and yet , in a cascade of events over a period of just three weeks from mid - october , it lost two - thirds of its share value , became the subject of a us securities exchange commission ( sec ) investigation , and was taken over by a rival a third in size . ( latest reports create some doubt about whether this will go through . ) what went wrong ?
no , the events had nothing to do with dabhol . indeed , if , for us in india , enron will always be associated with the controversial power project , elsewhere it is likely become a case study for students of accounting , finance and general management . ( on second thoughts , even its indian adventures would make an excellent case study ! )
but first , a recount of what happened . after announcing on october 16 , without much explanation or transparency , that it has taken a charge of $ 1 . 2 billion against equity , enron ' s share price started tumbling . apparently , the charge was the result of some financial transactions , and the sec launched an investigation . the chief financial officer ( cfo ) , who was directly involved with the transactions , the company ' s treasurer and a couple of other senior officials were sacked .
perhaps most damagingly , enron revised its accounts from 1997 onwards , reducing profits by about $ 600 million and increasing debt by a somewhat similar amount . as a result , enron ' s credit rating was downgraded .
it seems the root problem was not in its basic business of power and gas trading , but in its investment activities controlled by the cfo . these comprised private equity , and enron ' s share in each of the investee companies was kept artificially below 50 per cent to avoid consolidation of accounts . to this end , outside investors were brought in and assured of equity in enron itself , should the value of the investee company ( ies ) fall below agreed threshold ( s ) .
all this was done to keep the losses in investments off - balance sheet , and mitigate their impact on reported profits . many other us corporations including j p morgan chase , which had large private equity investments , have suffered on this score ( see world money october 15 ) . enron wanted to avoid this and , last year , paid its since - dismissed cfo $ 30 million for his creative accounting genius .
incidentally , those enamoured of us gaap and its alleged superiority over the rest of the world should note that all these gimmicks were blessed by the company ' s auditors one of the big five firms , which was paid $ 25 million as audit fees and $ 27 million for other services by enron last year .
the restatement of the accounts from 1997 onwards became necessary as the enron management / board and the auditors were forced , on review , to admit that at least some of the transactions should have been on , rather than off , balance sheet . details of all the transactions in question are yet to come out , but what has come out is bad enough .
but this apart , a billion dollar hit for a company of the size ( $ 300 billion ) or cash flow ( $ 3 billion ) of enron is , by itself , hardly a death warrant . but it turned out to be just that for enron .
perhaps because it was too arrogant ? perhaps also because its accounts lacked transparency and their opaqueness ensured that investors ' confidence was always somewhat fragile ?
but there are two other points worth noting : the professionalism of equity analysts and whether the event restores somewhat the balance between trading and producing . as for the first , the professional analysts were surely aware of the opaqueness of the accounts , but few questioned the management aggressively on the subject . perhaps the stock was too glamorous and typified the spirit of the times trading assets was what the " masters of the universe " did , not the boring old business of producing oil or power or cars . the enron management itself was proud of the way it operated in its principal activity of trading in power and gas , with skilling , the former ceo , claming that " we are on the side of angels . we are taking on the entrenched monopolies . we are bringing the benefits of choice and free markets to the world . " ( the quotation is from an interview in businessweek , prior to skilling ' s inglorious exit from enron a couple of weeks before the bubble burst ) .
for the analysts , there was also safety in numbers . skilling claimed that " enron ' s operations are built around the integration of modern financial technologies and physical technologies " , bringing derivatives theory to trading in power and gas ! obviously , the fate of long term capital management has not led to more sober management of trading risks .
surely the role of " markets " should be to reduce the distance , and cost , between producer and consumer ? one does feel that there is something perverse in a society that values , in terms of compensation , the trader ( don ' t forget this is just a euphemism for the speculator ) over the producer whether in the bond , currency or power and gas markets . the markets and , indeed , greed obviously have a role to play , but surely the pendulum needs to swing a little bit to the left ?
copyright ? 2000 dow jones & company , inc . all rights reserved .
india ' s mehta comments on birla group offer to buy enron stake
2001 - 11 - 26 03 : 42 ( new york )
mumbai , nov . 26 ( bloomberg ) - - jaywantiben mehta , india ' s
union minister of state for power , comments on reports of aditya
birla group , which owns grasim industry ltd . , the nation ' s third -
biggest cement maker , bidding for enron ' s stake in dabhol power
co .
enron wants to sell its 65 percent stake in dabhol power ,
india ' s biggest foreign investment , at cost . the project is mired
in a tariff dispute over $ 64 million in bills that haven ' t been
paid by the maharashtra state electricity board , its only
customer , for eight months .
` ` one more bidder will increase competition , which is
welcome .
` ` any step in the national interest is good .
` ` cheap energy is always in the national interest since we
want to increase electricity generation and sell it at a
reasonable price .
` ` i can ' t comment on the time - frame of buying out the enron
stake until the legal wrangles are solved . once that ' s cleared ,
then we will try and clear the proposal quickly . ' '
- - gautam chakravorthy in the mumbai newsroom ( 91 - 22 ) 233 - 9027
enron mentions - 11 / 26 / 01
dynegy seems to have options in enron deal
the wall street journal , 11 / 26 / 01
volatility fell slightly in light holiday trading as enron calls , lilly puts attracted interest
the wall street journal , 11 / 26 / 01
the other instant powerhouse in energy trading
businessweek , 11 / 26 / 01
all eyes on the enron prize if the deal holds , dynegy will walk away with some juicy assets
businessweek , 11 / 26 / 01
confused about earnings ? you ' re not alone . here ' s what companies should do - - and what investors need to know
businessweek , 11 / 26 / 01
end the numbers game
businessweek , 11 / 26 / 01
free and clear of enron ' s woes
businessweek , 11 / 26 / 01
companies & finance international - enron still optimistic of averting financial meltdown .
financial times , 11 / 26 / 01
schwab chief ' s main theme : diversification
the wall street journal , 11 / 26 / 01
enron pursuing a cash infusion energy : company is seeking as much as $ 1 billion as it tries to shore up its endangered acquisition by dynegy .
los angeles times , 11 / 26 / 01
dynegy optimistic that enron merger will succeed - ft
dow jones international news , 11 / 26 / 01
dynegy purchase prompts antitrust concerns , l . a . times says
bloomberg , 11 / 26 / 01
enron hopes for infusion of capital : seeks us $ 500 m as talks of dynegy merger continue
national post , 11 / 26 / 01
india ' s aditya birla not eyeing enron ' s stake in dabhol
dow jones international news , 11 / 26 / 01
the enron scandal
business standard , 11 / 26 / 01
india ' s mehta comments on birla group offer to buy enron stake
bloomberg , 11 / 26 / 01
dynegy seems to have options in enron deal
by rebecca smith and robin sidel
staff reporters of the wall street journal
11 / 26 / 2001
the wall street journal
a 3
( copyright ( c ) 2001 , dow jones & company , inc . )
with the stock market telling dynegy inc . that energy trader enron corp . isn ' t worth even half what dynegy has offered to pay , analysts and investors are paying close attention to the circumstances under which dynegy could bargain a lower price or even walk away from the merger deal .
earlier this month , houston - based dynegy offered to buy its far larger cross - town rival in an all - stock deal that currently values enron shares at $ 10 . 85 apiece , or a total of about $ 9 . 2 billion . but in the wake of post - agreement disclosures by enron that its future earnings are likely to be substantially less than expected , the company ' s stock has been hammered . in 1 p . m . trading on the new york stock exchange on friday , enron shares fell 30 cents to $ 4 . 71 . the stock is down 94 % so far this year and far short of the per - share takeover price . dynegy shares rose 64 cents to $ 40 . 40 .
although dynegy and enron both say they are going ahead with the deal under the terms negotiated , dynegy does appear to have other options . the agreement with enron contains a broad " material adverse change " clause as well as some specific trigger points that could be invoked .
dynegy officials performed " due diligence " throughout the holiday weekend , seeking to learn more about the intimate workings of enron , which has suffered a series of damaging blows . since mid - october , enron has disclosed that some of its officers participated in personally enriching deals that moved assets off enron ' s balance sheet , for a time , to several private partnerships . those deals are now the subject of a securities and exchange commission investigation . past treatment of some of those deals has been termed an " accounting error " by enron and it twice has rejiggered its earnings since oct . 16 . at one point , enron restated downwards nearly five years of earnings .
an enron spokeswoman said the company was proceeding in the belief that the deal would be completed as agreed . dynegy spokesman john sousa said the two sides are forging ahead although he acknowledged that the walk - away provisions " are broad , by design , to ensure adequate protection for dynegy shareholders . " shareholders of both firms must still vote on the merger agreement .
clauses related to a " material adverse change , " also known as a " material adverse effect , " have been the focus of much attention among merger professionals this year , due , in part , to the stock market ' s fluctuations and the economic slowdown that have caused some buyers to reconsider planned acquisitions .
but such clauses rarely are invoked by a buyer or seller because they are considered extremely difficult to prove . both parties typically are reluctant to lay out specific terms for canceling a deal , much the way a bride and groom often balk at negotiating a prenuptial agreement since it appears to envisage a breakup of the marriage even before it begins .
furthermore , a key court case earlier this year affirmed widespread views that a buyer can ' t easily walk away from a merger . in that case , meat - processing concern tyson foods inc . sought to cancel a planned acquisition of meat - packer ibp inc . due to a drop in ibp ' s earnings and a write - down of an ibp subsidiary . but a delaware judge refused to let tyson cancel the pact , saying tyson had been aware of the cyclical nature of ibp ' s business and the accounting issue .
in a lengthy june 18 opinion , delaware chancery court vice chancellor leo e . strine jr . wrote that " . . . the important thing is whether the company has suffered a material adverse effect in its business or results of operations that is consequential to the company ' s earnings power over a commercially reasonable period , which one would think would be measured in years rather than months . "
that interpretation has created ripples in the deal - making community , prompting some transactions to include more details about circumstances under which deals can be terminated . since the sept . 11 attacks , for example , a handful of merger agreements have specified that future terrorist activity would qualify as a " material adverse change , " or mac .
a key issue for any firm alleging there has been a material adverse change is " whether the new facts go to the guts of the strategic opportunity or is it just a hiccup , " says meredith brown , co - chairman of the mergers and acquisitions group at law firm debevoise & plimpton in new york . he adds that a court " may be skeptical " if dynegy claimed that enron ' s post - merger agreement disclosures were a surprise .
the enron - dynegy merger agreement includes several triggers permitting either side to seek termination . enron can quit the deal if it receives a substantially better offer , although it is prohibited from soliciting one . in such a case , it could be required to pay a $ 350 million " topper fee " to dynegy and its co - investor , chevrontexaco inc .
dynegy can alter the deal if enron faces " pending or threatened " litigation liabilities that are " reasonably likely " to cost enron $ 2 billion . if those liabilities hit $ 3 . 5 billion " an enron material event will be deemed to have occurred , " presumably allowing dynegy to call the whole thing off . in some situations , dynegy would be liable for a $ 350 million fee , as well .
karen denne , the enron spokeswoman , said her firm doesn ' t believe that losses arising from the normal course of business would qualify as a material event . the liability must result from litigation . currently , the company faces more than a dozen shareholder suits alleging breach of fiduciary duty by officers and directors , issuing false and misleading reports and other offenses .
deal makers who aren ' t involved in the combination say the steep drop in enron ' s stock price since the merger agreement was signed wouldn ' t by itself give dynegy the ability to cancel the pact or force enron to renegotiate its terms . instead , they say , dynegy would likely have to prove that enron ' s worsening financial condition was an unanticipated event , which could be difficult in light of the company ' s highly publicized problems and dynegy ' s frequent statement that it clearly understands enron ' s businesses . still , there is another standard clause in the merger document that would allow dynegy to terminate the deal if " any representation or warranty of enron shall have become untrue . "
other energy companies have abandoned deals following a widening gap in stock prices that changed an acquisition premium . western resources inc . of topeka , kansas last week sued public service co . of new mexico seeking hundreds of millions of dollars in damages after it failed to buy western ' s utilities . the lawsuit accused public service of breaching its " duty of good faith and fair dealing " and said the new mexico company tried to " sabotage " the deal as the two companies ' stock prices diverged . public service denies the accusations .
copyright ? 2000 dow jones & company , inc . all rights reserved .
options report
volatility fell slightly in light holiday trading as enron calls , lilly puts attracted interest
by cheryl winokur munk
dow jones newswires
11 / 26 / 2001
the wall street journal
b 8
( copyright ( c ) 2001 , dow jones & company , inc . )
new york - - the options market dozed , as many participants stayed home to recover from too much turkey and football .
the chicago board options exchange ' s market volatility index , or vix , which measures certain standard a fall shows investor optimism .
volatility has been dropping from post - sept . 11 levels in recent weeks amid victories over the taliban in afghanistan and interest - rate cuts by the federal reserve and other central banks . vix ranged between 30 and 40 for several weeks following the attacks .
volatility is likely to remain low , said mika toikka , head of options strategy at credit suisse first boston . " typically , going into the thanksgiving and december holidays , we tend to experience a seasonal drift lower in implied volatility . we would expect the same this year , especially in markets outside the u . s . where volatility is still lingering at high levels , " mr . toikka wrote in a recent research note .
the cboe ' s nasdaq volatility index , or vxn , a sentiment barometer for the technology sector , fell 1 . 86 to 50 . 82 while the american stock exchange ' s nasdaq volatility index , or qqv , dropped 1 . 03 to 42 . 74 .
elsewhere in the options market :
calls in enron corp . , the embattled houston energy and trading company , continued to trade briskly , with one investor buying 10 , 000 january 5 calls and simultaneously selling 12 , 250 january 10 calls .
more than 14 , 800 of the january 5 contracts traded , compared with open interest of 3 , 640 , as shares fell 33 cents , or 6 . 6 % , to $ 4 . 68 . these calls cost $ 1 . 40 on the american stock exchange where most of the volume was traded .
more than 15 , 000 of the january 10 contracts traded , compared with open interest of 30 , 674 . these out - of - the - money calls cost 30 cents on the amex .
eli lilly & co . ' s december 80 out - of - the - money puts also were popular friday , as shares fell 91 cents , or 1 . 1 % , to $ 82 . 42 . morgan stanley cut its rating on the company to neutral from outperform , saying the stock has become too expensive even with food and drug administration approval of its potential blockbuster drug xigris , which treats septic infections . more than 3 , 000 of these puts traded , compared with open interest of 6 , 427 . they cost $ 1 . 25 on the cboe , which saw much of the volume .
copyright ? 2000 dow jones & company , inc . all rights reserved .
the corporation : acquisitions
the other instant powerhouse in energy trading
by louise lee in san mateo , calif .
11 / 26 / 2001
businessweek
96
( copyright 2001 mcgraw - hill , inc . )
it ' s not easy being no . 4 . despite a $ 35 billion merger completed in october , chevrontexaco corp . is still not one of the oil superpowers . nor , at more than $ 90 billion a year in revenues , is it a scrappy little guy . so chairman david j . o ' reilly has been searching for a strategy beyond just drilling for more oil and gas .
now , he may have something : a big stake in the no . 1 energy - trading company . chevron corp . has owned 26 % of dynegy inc . since 1996 , and with dynegy ' s planned acquisition of enron corp . , the top energy trader , chevrontexaco is making the oil industry ' s most aggressive push yet into this fast - growing business . it plans to eventually pump $ 2 . 5 billion into the combined dynegy and enron to maintain its 26 % stake , and it might raise that share . so , while chevrontexaco ' s much bigger rivals run small in - house trading operations , energy trading may soon account for more than 10 % of chevrontexaco ' s earnings . ` ` chevron is now positioned to be a leader in the business , ' ' says analyst arjun murti at goldman , sachs the most likely target is a natural - gas company . maybe it ' s not so bad being no . 4 .
illustration : chart : chevron ' s growing cash hoard
copyright ? 2000 dow jones & company , inc . all rights reserved .
the corporation : acquisitions
all eyes on the enron prize if the deal holds , dynegy will walk away with some juicy assets
by stephanie anderson forest , with wendy zellner in dallas , and peter coy and emily thornton in new york
11 / 26 / 2001
businessweek
94
( copyright 2001 mcgraw - hill , inc . )
as houston - based enron corp . imploded amid a dizzying scandal over its finances , few would have blamed dynegy inc . ceo charles l . watson if he had sat back and gloated . after all , watson had watched as his bigger , brasher crosstown rival sniffed at dynegy ' s more cautious strategy , all the while garnering most of the credit for reshaping the energy - trading business .
instead , watson picked up the phone on oct . 24 and called enron chairman , ceo , and longtime acquaintance kenneth l . lay to ask how he could help . lay didn ' t respond immediately , but as enron ' s stock continued to plunge and the company faced a cash squeeze , it became clear what the only realistic answer could be : bail us out .
so two days later , lay invited watson to his river oaks home near downtown houston for breakfast to discuss a deal . over muffins and ` ` a bad cup of coffee ' ' the next day , watson recalls , they sketched the outlines , and by 10 p . m . that night , the investment bankers were called in . on nov . 9 , dynegy announced that it would pay about $ 10 billion , plus the assumption of $ 13 billion in debt , to buy enron , which is nearly four times its size . the key to the deal was dynegy ' s immediate $ 1 . 5 billion infusion of cash to shore up enron ' s balance sheet and save its credit rating . the money came from dynegy ' s 26 % owner , chevrontexaco corp .
without that help , enron - - the seventh - largest u . s . company , based on its $ 100 billion in sales last year - - may well have faced bankruptcy . watson says that he never would have imagined such an outcome in his wildest dreams . ` ` i don ' t think anybody foresaw the problems [ at enron ] , ' ' he says . ` ` it ' s been incredible to watch . ' '
watson , 51 , has to make good on what may well be his riskiest investment yet . if he can pull it off , the new dynegy will have revenues of more than $ 200 billion and $ 90 billion in assets , including more than 22 , 000 megawatts of power - generating capacity and 25 , 000 miles of pipeline . it would control an estimated 20 % to 25 % of the energy - trading market , up from about 6 % now .
that would be sweet vindication for watson ' s strategy . dynegy backs trading operations with hard assets such as power plants , which allows the company to guarantee a supply of electricity to a buyer . in contrast , enron has worked furiously to shed power plants and oil - and gas - generating fields , believing it could earn higher returns using its trading and technology expertise to tap assets owned by others in markets including steel , pulp , and paper . irresistible bargain . as enron ' s stock slid below $ 9 from its august , 2000 , high of $ 90 , it became a bargain that watson couldn ' t pass up . it would have taken years for dynegy to build up a market - making operation to match enron ' s . its risk - management systems are top - of - the - line . enron ' s commercial - services unit , which manages power supplies for corporate customers such as wendy ' s international inc . , is three or four years ahead of dynegy ' s , says steve bergstrom , president of dynegy . watson says he still plans to get rid of the $ 8 billion worth of assets lay had earmarked for sale , including the portland ( ore . ) general electric plant and oil and gas assets in india . for the $ 1 . 5 billion , though , if the deal falls through dynegy will have the right to enron ' s prized northern natural gas pipeline , worth an estimated $ 2 . 25 billion . and dynegy can walk away if enron ' s legal liabilities exceed $ 3 . 5 billion .
watson firmly believes that enron suffered from a crisis of confidence , not a meltdown of its core business . indeed , enron ' s wholesale - trading operation earned $ 2 . 3 billion last year . says watson : ` ` we know the business . we looked under the hood , and guess what ? it ' s just as strong as we thought it was . ' '
but the trading profits were obscured in recent weeks by enron ' s accounting tricks . the biggest danger for watson is that there are other time bombs ticking away . already , the company has slashed its reported earnings since 1997 by $ 591 million , or 20 % of its total , to account for controversial partnerships involving enron officials . the securities some compare it to a fraternity . dynegy ' s decision to issue new stock options to some enron employees may soothe battered egos . it should help , too , that lay decided not to take the $ 60 million golden parachute he could have received in a buyout . as it is , lay will not have a management job with the new company .
dynegy often seemed to be an enron wannabe , following it into online trading and commercial services . still , dynegy ' s 361 % stock gains last year eclipsed enron ' s 87 % rise , and it rankled some that lay ' s execs got more credit . ` ` chuck watson may not have been in the spotlight , but he has always been at the forefront of this business , ' ' says bruce m . withers , who sold his trident ngl inc . to dynegy in 1995 . watson will get more attention next year - - he ' s a 15 % owner of the new houston texans pro football team . but with his bold takeover of enron , watson has ensured that he ' s off the sidelines for good .
photograph : dynegy ' s watson he says enron ' s core business is strong . but others worry that more accounting tricks will turn up photograph by najlah feanny / corbis saba illustration : chart : powering up at dynegy chart by laurel daunis - allen / bw
copyright ? 2000 dow jones & company , inc . all rights reserved .
cover story
confused about earnings ? you ' re not alone . here ' s what companies should do - - and what investors need to know
by nanette byrnes and david henry
with mike mcnamee in washington
11 / 26 / 2001
businessweek
76
( copyright 2001 mcgraw - hill , inc . )
in an age when giant earnings write - offs have become commonplace , it ' s hard to shock wall street . but on nov . 8 , enron corp . managed to do it . after years of high - octane growth that had seen earnings surge by up to 24 % a year , the houston - based energy company acknowledged that results for the past three years were actually overstated by more than a half - billion dollars . it was confirmation of investors ' worst fears . three weeks earlier , enron had announced a big drop in shareholders ' equity , sparking fears that its hideously complex financial statements were distorting its true performance . management pointed to a number of factors , including a dubious decision to exclude the results of three partnerships from its financial statements and a billion - dollar error several years earlier that had inflated the company ' s net worth .
enron may be an extreme example of a company whose performance fell far short of the glowing picture painted by management in its earnings releases , but it is hardly alone . this year , corporate america is expected to charge off a record $ 125 billion , much of it for assets , investments , and inventory that aren ' t worth as much as management thought ( chart , page 79 ) . even if companies don ' t go back and restate earnings , as enron is doing , those charges cast doubt on the record - breaking earnings growth of the late ' 90 s .
not since the 1930 s has the quality of corporate earnings been such an issue - - and so difficult for investors to determine . there ' s more at stake than the fortunes of those who bought shares based on misleading numbers . if even the most sophisticated financial minds can ' t figure out what a company actually earns , that has implications far beyond enron . u . s . financial markets have a reputation for integrity that took decades to build . it has made the u . s . the gold standard for financial reporting and the preeminent place to invest . it has also ensured ready access to capital for u . s . corporations . that a company such as enron , a member of the standard & poor ' s 500 - stock index and one of the largest companies on the new york stock exchange , could fall so far so fast shows how badly that gold standard has been tarnished . ` ` the profession of auditing and accounting is , in fact , in crisis , ' ' says paul a . volcker , former chairman of the federal reserve and now one of the leaders of the international accounting standards board .
sometimes , as in the case of enron , fuzzy numbers result from questionable decisions in figuring net earnings . more often , though , the earnings chaos results from a disturbing trend among companies to calculate profits in their own idiosyncratic ways - - and an increasing willingness among investors and analysts to accept those nonstandard tallies , which appear under a variety of names , from ` ` pro forma ' ' to ` ` core . ' ' ( enron offers its own such version . before investors untangled the importance of enron ' s first announcement , its stock rose briefly because it told investors that its ` ` recurring net income ' ' had met expectations . ) the resulting murk makes it difficult to answer the most basic question in investing : what did my company earn ?
why calculate a second set of earnings in the first place ? because the numbers reached by applying generally accepted accounting principles ( gaap ) are woefully inadequate when it comes to giving investors a good sense of a company ' s prospects . many institutional investors , most wall street analysts , and even many accountants say gaap is irrelevant . ` ` i don ' t know anyone who uses gaap net income anymore for anything , ' ' says lehman brothers inc . accounting expert robert willens . the problem is that gaap includes a lot of noncash charges and one - time expenses . while investors need to be aware of those charges , they also need a number that pertains solely to the performance of ongoing operations .
that ' s what operating earnings are supposed to do . but because they ' re calculated in an ad hoc manner , with each company free to use its own rules , comparisons between companies have become meaningless . ` ` no investor - - certainly not any ordinary investor - - can read these in a way that ' s useful , ' ' says harvey l . pitt , chairman of the securities & exchange commission . the sec is examining whether new rules are needed to clarify financial reports and perhaps restrict use of pro formas .
what ' s badly needed is a set of rules for calculating operating earnings and a requirement to make clear how they relate to net income . in the end , investors need two numbers - - a standardized operating number and an audited net - income number - - and a clear explanation of how to get from one to the other . ` ` out of hand . ' ' a widespread consensus is building to do just that . in early november , s & p proposed a set of rules for companies to follow when tallying operating earnings . only the week before , the financial accounting standards board , the rulemakers for gaap , had announced that they , too , would be taking up this issue . volcker says the international accounting standards board is also seeking a uniform definition of operating earnings .
` ` over the past two or three years , the use of creative earnings measures has grown and grown and grown to the point where it has really gotten out of hand , ' ' says david m . blitzer , s & p ' s chief investment strategist . ` ` earnings are one of the key measures that anybody looks at when they ' re trying to evaluate a company . if people want to use an operating - earnings measure , we better all know what we ' re looking at . ' '
without those standards in place , the gap between earnings according to generally accepted accounting principles and earnings according to wall street is only going to grow wider and more confusing . look at the variance in earnings per share calculated for the s & p 500 for the third quarter : it ' s $ 10 . 78 according to wall street analysts as tallied by thomson financial / first call , $ 9 . 17 according to s & p , and $ 6 . 37 according to numbers reported to the sec under gaap . ( s & p , like businessweek , is owned by the mcgraw - hill companies . )
the lack of a standard measure can be costly to those who choose wrong . use first call ' s earnings for the past four quarters and you get a relatively modest price - earnings ratio of 23 for the s & p 500 . but run the numbers using gaap earnings , and suddenly the market has a far steeper p - e of 38 .
how did we get into this mess ? investors and analysts have been calculating operating earnings for years , and for years , reasonable people could more or less agree on how to do it . then came the dot - com bubble , along with increased pressure from wall street for companies to meet their quarterly earnings forecasts . suddenly , companies that hadn ' t turned a profit by any conventional measure started offering ever more inventive earnings variants . these customized pro forma calculations excluded a grab bag of expenses and allowed upstart companies to show a profit . ` ` tower of babel . ' ' pro forma formulas vary wildly from company to company and even from quarter to quarter within the same company , casting doubt on their validity . and these days , the gulf between net earnings and pro forma earnings is wider than ever . s & p ' s tallies fall between the two : s & p ' s numbers are more systematic than pro forma , but they aren ' t followed widely enough to be a standard . ` ` investors are facing a tower of babel , ' ' says robert k . elliott , former chief of the american institute of certified public accountants ( aicpa ) and a retired kpmg partner . ` ` it ' s not standardized , and the numbers are not audited . ' '
that makes it tough to evaluate a company ' s performance . in the quarter ended on sept . 30 , nortel networks corp . offered shareholders at least three earnings numbers to choose from . by conservative gaap accounting , the telecommunications giant lost $ 1 . 08 a share . the company also provided two possible pro forma options : a 68 cents loss that excluded ` ` special charges , ' ' including some acquisition costs and restructuring charges , and a still better 27 cents loss that further excluded $ 1 . 9 billion of ` ` incremental charges , ' ' such as writing down inventories and increasing provisions for receivables . wall street chose the rosiest one .
confusing ? you bet . companies defend their pro forma calculations by pointing out that they ' re merely filling a void : investors are clamoring for a measure that gives them better insight into their company ' s future . the goal is to get to the core of the business and try to measure the outlook for those operations . ` ` there are good reasons why there is an emphasis on operating earnings , ' ' says volcker . ` ` it is an effort to provide some continuity and some reflection of the underlying progress of the company . ' ' besides , as companies like to point out , they still have to report gaap earnings , and investors are free to ignore everything else .
there ' s no starker lesson in the shortcomings of gaap than the $ 50 billion asset write - downs by jds uniphase corp . , the biggest charge of the year . near the height of the telecom bull market in july , 2000 , the san jose ( calif . ) maker of fiber optics topped off a buying spree by acquiring competitor sdl inc . for $ 41 billion in stock . when the deal closed in february , its assets ballooned from $ 25 billion to $ 65 billion . but by then , shares of jds and other fiber - optics makers were collapsing . to bring its acquisitions into line with their new value , the company took charges of $ 50 billion . despite the fact that the bulk of its losses stemmed from stock transactions and involved no cash paid , gaap required that the charges be taken out of net income . so according to gaap , jds lost $ 56 billion in the fiscal year ending in june - - a staggering figure for a company whose revenues over the past five years added up to only $ 5 billion .
analysts and the company argue that besides not involving cash , the charge - off was all about the past , a right - sizing of values that had gotten out of hand . to analyze the company ' s prospects , they excluded the $ 50 billion charge . ` ` the accounting is not designed to make things look better but to describe what happened , ' ' says jds uniphase chief financial officer anthony r . muller , ` ` and we ' ll live with the consequences , whatever they are . ' ' analysts make a similar defense . ` ` my goal is to figure out what the business is going to produce so that we can value the company , ' ' says lehman brothers analyst arnab chanda . glacial pace . are jds ' s pro forma numbers realistic - - a fair gauge of jds ' s ongoing operations ? right now , it ' s hard for investors to judge . and that ' s the kind of ambiguity s & p and others would like to eliminate . in november , s & p circulated a memo on how to standardize operating earnings . under the proposal , operating earnings would include the costs of purchases , research and development , restructuring costs ( including severance ) , write - downs from ongoing operations , and the cost to the company of stock options . it would exclude merger - and - acquisition expenses , impairment of goodwill , litigation settlements , and the gain or loss on the sale of an asset .
when s & p applied roughly that formula to jds uniphase , it split the difference between wall street and gaap . because of differences in what each group included in their earnings calculations , the results were chaotic . using gaap , the company lost $ 9 . 39 a share . s & p figures it lost $ 3 . 19 , while the company put the loss at 36 cents . meanwhile , wall street says it made 2 cents .
the s & p standard may make sense , but it raises the question : where is the financial accounting standards board , the group in charge of gaap ? chairman edmund l . jenkins says fasb will be addressing the problems . still , investors shouldn ' t expect any improvement soon . the pace of change at fasb tends to be glacial . it typically takes four years to complete a new standard . in 1996 , for example , the board realized that standards on restructuring charges had some big loopholes and it resolved to put the issue on its agenda . in june , 2000 , the board finally issued a draft of a new standard , asked for comments , and held a public hearing . in october , 2001 , the board said it still wasn ' t ready to put a fix in place . now , the recession has set off another wave of restructuring charges , and the fasb still doesn ' t have new rules .
the slow pace means the standard - setters sometimes fail to react to sudden changes in the market . the most recent failure followed the terrorist attacks on september 11 . an fasb task force , unable to come up with a set of rules for separating september 11 costs from general expenses , instead told companies that the disaster could not be treated as an extraordinary item . so gaap earnings include costs stemming from the disaster as part of a company ' s general performance . many companies have nevertheless broken those costs out in their unaudited press releases .
many more are likely to do so in the fourth quarter . indeed , 2001 is shaping up to be one for the record books . a poor economy and the devastating aftereffects of september 11 have resulted in a slew of unusual charges that are unlikely to recur and that no one could have foreseen . but there ' s a growing concern that the earnings fog is providing managers with cover to hide missteps of the past within that vast category of supposedly one - time charges . the temptation will be to take as big a charge as possible now , while investors are braced for bad news . not only can managers sweep away yesterday ' s errors , but tomorrow ' s earnings will look even better .
the basic question comes down to what constitutes a special expense - - a charge so unusual that to include it in the earnings calculation would be to distort the truth about a company ' s performance . usually , big charges fall into a few categories , including charges for laying off workers and restructuring a company , charges for assets that have lost value since they were purchased , charges for investments that have lost value , and charges for inventory that has become obsolete . in a recent study , harvard business school professor mark t . bradshaw found that companies are increasingly calling these charges unusual . that gives them a rationale for excluding them from their pro forma calculations .
lots of critics disagree , saying such charges are often an inevitable part of the business cycle and should be reflected in a company ' s earnings history . they certainly should not be ignored by investors . ` ` charges are real shareholder wealth that ' s been lost , ' ' argues david w . tice , manager of the prudent bear fund , a mutual fund with a pessimistic bent that ' s up 17 % so far this year . ` ` it ' s money they spent on something no longer worth what it was , a correction of past earnings , or a reserve for costs moving forward . whatever the reason , it ' s a real cost to the company , and that hurts shareholders . ' ' without standards , excessive write - offs from operating earnings can obscure actual performance . without any rules , companies calculate operating earnings inconsistently in order to put their companies in the best possible light . dell computer corp . is a good example of this ` ` heads i win , tails you lose ' ' school of accounting . for years , dell benefited from gains in its venture - capital investments and was happy to include those gains in its reported earnings , where they appeared as a separate line on the income statement . but this year , when those gains turned to losses , the computer maker issued pro forma numbers that excluded that $ 260 million drag . dell spokesman michael maher says the company ' s press releases and sec filings break out investment income and give gaap numbers as well as pro forma . ` ` in our view , the numbers are reported clearly , ' ' says maher . ` ` it ' s all out there for the consuming public . ' ' past puffery . many experts believe special charges are a sign that past performance was exaggerated . what should investors make of a company such as gateway inc . ? two restructuring charges in the first and third quarters , minus a small extraordinary gain , totaled $ 1 . 12 billion , or about $ 100 million more than the company made in 1998 , 1999 , and 2000 combined . which is the truer picture of its performance and potential ? the write - offs or the earnings ? write - offs for customer financing are another example . when nortel increased its reserves for credit extended to customers by $ 767 million in september , it effectively admitted it had booked sales in the past to companies that couldn ' t pay - - in effect overstating its performance in those earlier periods . in addition , nortel says booking sales and accounting for credit are unrelated issues . tech companies blame the sharp downturn in their industry for the big write - offs . and these aren ' t isolated examples . peter l . bernstein , publisher of newsletter economics & portfolio strategy , found that from 1989 to 1993 , 20 % of earnings vanished into write - offs .
big charge - offs can also distort future performance . critics contend that excess reserves are often used as a sort of ` ` cookie jar ' ' from which earnings can be taken in future quarters to meet wall street ' s expectations . or charges taken this year , for example , which is apt to be a lousy one for most companies anyway , might include costs that would otherwise have been taken in future periods . prepaying those costs gives a big boost to later earnings . rules for figuring operating earnings would help , but this is an area that will always involve a certain amount of judgment - - and therefore invite a certain amount of abuse . ` ` people are going to write off everything they can in the next two quarters because they ' re having a bad year anyway , ' ' says robert g . atkins , a mercer management consultant .
part of the lure of big special charges is that investors tend to shrug them off , believing that with the bad news out in the open , the company is poised for a brighter future . since gateway detailed its third - quarter charge of $ 571 million on oct . 18 , wall street has bid the stock up 48 % , compared with a 6 % runup for the s & p 500 .
often , though , investors should take exactly the opposite message . if , for example , part of a restructuring involves slashing employee training , information - technology spending , or research and development , the cuts could depress future performance , says baruch lev , a professor of accounting at the stern school of business at new york university . ` ` are these really one - time events ? ' ' he asks . ` ` or is this the beginning of an avalanche ? ' ' indeed , morgan stanley dean witter & co . strategist steve galbraith has found that in the year following a big charge - off to earnings companies have underperformed the stock market by 20 percentage points . ` ` la la land . ' ' investors are apt to be faced with more huge write - offs next year , even if the economy doesn ' t continue to worsen . why ? the transition to a new gaap rule that changes the way companies account for goodwill - - a balance - sheet asset that reflects the amount paid for an acquisition over the net value of the tangible assets . under the new rule , companies will have to assess their properties periodically and decrease their worth on the balance sheet if their value falls . an informal survey by financial executives international of its member controllers and financial officers found that at least a third expect to take more charges .
but figuring out the proper value of those assets is no easy task . unless there is a comparable company or factory with an established market price , valuing them involves a lot of guesswork for which there are no firm rules . ` ` what this is really coming down to is corporations and their auditors coming up with their own tests for impairment , ' ' says the stern school ' s professor paul r . brown . ` ` it ' s la la land . ' '
while the tidal wave of special charges is providing cover for earnings games , it could also be an impetus for change - - especially in the wake of the dot - com fiasco . indeed , there are some signs of a backlash . the real estate investment trust industry was a pioneer of engineered earnings , with its ` ` funds from operations , ' ' or ffo . but now some reits have begun to revert to plain old gaap earnings . hamid r . moghadam , ceo of san francisco - based amb property corp . , shifted back to gaap in 1999 . ` ` the reason i don ' t like ffo is very simple , ' ' says moghadam . ` ` one company ' s numbers look better than another one ' s even if they had identical fundamental results . ' '
there are other steps fasb could take to improve financial reporting and restore gaap ' s status . trevor s . harris , an accounting expert at morgan stanley , says it could force companies to make clear distinctions between income from operations and income from financial transactions . lehman ' s willens says companies should provide more information on cash expenses and how they bear on earnings . an easy step would be to require companies to file their press releases with the sec .
at the least , says lev , companies must clearly explain how their pro forma numbers relate to the gaap numbers . otherwise , he says , investors ` ` see numbers floating there , and where did they come from ? ' ' in today ' s environment of unregulated pro forma calculations and supersize write - offs , no question is more important to investors .
high - gloss glossary
companies are using a variety of accounting practices to put the best spin on
their results . here ' s what those terms mean :
defining earnings :
net income
the bottom line , according to generally accepted accounting principles ( gaap ) .
sometimes called ` ` reported earnings , ' ' these are the numbers the securities &
exchange commission accepts in its filings .
operating earnings
an adjustment of net income that excludes certain costs deemed to be unrelated
to the ongoing business . although it sounds deceptively like a gaap figure
called ` ` operating income ' ' ( revenue minus the costs of doing business ) , it is
not an audited figure .
core earnings
another term for operating earnings . neither core nor operating earnings are
calculated according to set rules . they can include or exclude anything the
preparer wishes .
pro forma earnings
the 1990 s term for operating earnings . popularized by dot - coms , it sometimes
excludes such basic costs as marketing and interest .
ebitda
earnings before interest , taxes , depreciation , and amortization . the
granddaddy of pro forma , it was initially highlighted by industries that
carried high debt loads , such as cable tv , but has since come to be widely
quoted .
adjusted earnings
a new term for pro forma .
defining costs :
special charges
a general term for anything a company wants to highlight as unusual and
therefore to be excluded from future earnings projections .
asset impairments
charges taken to bring something a company paid a high price for down to its
current market value . many companies are now taking these charges on internal
venture - capital funds that bought internet and other high - tech stocks at
inflated prices .
goodwill impairments
the same idea as asset impairments except they ' re used to write down the
premium a company paid over the fair market value of the net tangible assets
acquired . these charges will explode in the first quarter of 2002 because of a
change in mergers - and - acquisitions accounting that eliminates goodwill
amortization and requires holdings to be carried at no more than fair values .
restructuring reserves
an accrued expense ( not usually cash ) to cover future costs of closing down a
portion of a business , a plant , or of firings . these are projected costs and
if overstated can later become a boost to earnings as they are reversed .
write - down
lowering the value of an asset , such as a plant or stock investment . it is
often excused as a bookkeeping exercise , but there may have been a real cost
long ago that now proves ill spent , or there may have been associated cash
costs , such as investment - banking fees .
illustration : chart : the big bath chart by eric hoffmann / bw
illustration : chart : earnings chaos chart by eric hoffmann / bw
copyright ? 2000 dow jones & company , inc . all rights reserved .
editorials
end the numbers game
11 / 26 / 2001
businessweek
130
( copyright 2001 mcgraw - hill , inc . )
what did the company earn ? that ' s the most basic question an investor can ever ask . the equity culture that has generated so much growth over the years depends on a clear answer , but getting one has become impossible . enron corp . just announced that its earnings for the past three years were overstated by half a billion dollars . how did one of the biggest companies on the new york stock exchange manage to inflate its earnings by 20 % without auditors , analysts , ratings agencies , and the business press ( businessweek included ) discovering it ? in part , blame the breakdown of standardized accounting rules and the anarchy that runs rampant in the financial statements of corporate america . the u . s . needs a new set of accounting rules that gives a clear picture of financial performance . without integrity in financial reporting , the u . s . cannot hope to remain the preeminent place to invest in the global marketplace ( page 76 ) .
the dot - com bubble was the first indication that there was something seriously wrong with accounting standards . companies without much of a business model customized their quarterly statements to exclude a grab bag of expenses in order to put a positive financial spin on their operations . wall street conspired in this and encouraged big companies to join in . soon , the method of calculating earnings began to vary from company to company and even from quarter to quarter within a company . it is now chaos .
a stricter adherence to accounting rules won ' t solve the entire problem . gaap , the generally accepted accounting principles , allow all kinds of one - time expenses and noncash charges . this obscures the performance of ongoing operations . no one can fathom what are true operating earnings because there are no guidelines as to what constitutes an extraordinary expense . the result is total confusion . take earnings per share for the standard & poor ' s 500 - stock index for the second quarter . under thomson financial / first call standards , it is $ 11 . 82 . but it ' s $ 9 . 02 according to s & p and $ 4 . 83 under gaap . how can investors make intelligent decisions ?
the financial accounting standards board clearly is failing to do its job . it has promised to write a set of rules that calculates operating earnings and relates them to net earnings , but it hasn ' t delivered . the rating agency standard & poor ' s ( owned by the mcgraw - hill companies , as is businessweek ) is doing a better job . it recently drew up a definition of ` ` operating earnings ' ' that includes restructuring costs ( including severance ) , writedowns from ongoing operations , and the cost of stock options . it excludes merger and acquisition expenses , litigation settlements , impairment of goodwill , and gains or losses on asset sales . this is a beginning that fasb should build on . the accounting anarchy has to end .
copyright ? 2000 dow jones & company , inc . all rights reserved .
up front : afterlives
free and clear of enron ' s woes
edited by sheridan prasso
by stephanie anderson forest
11 / 26 / 2001
businessweek
16
( copyright 2001 mcgraw - hill , inc . )
back in enron ' s heyday , one of its rising stars was rebecca mark . nicknamed ` ` mark the shark ' ' because of her ferocious ambition , she made her name in the early ' 90 s building the energy giant ' s international operations , including the now - troubled dabhol power plant in india . once rumored to be a successor to enron ceo ken lay , she resigned from enron in august , 2000 , after two years of heading enron ' s ailing water company spin - off , azurix .
these days , as enron struggles to stay afloat , mark - jusbasche ( who hyphenated her name with that of her husband of two years ) is watching the action from the sidelines . and she ' d like to keep it that way . ` ` i ' m very surprised and saddened by [ what has happened at enron ] , and i wish them all the best , ' ' she says . beyond that , mark - jusbasche , 47 , is not much interested in talking about enron , which is being acquired by a small rival after a spectacular wall street flameout . mark left enron with millions of dollars worth of enron shares , although she says she has sold them since .
mark - jusbasche spends most of her time serving on advisory boards , both at yale and harvard business schools , as well as the school where her 16 - year - old twin sons from a previous marriage are sophomores .
in her spare time , she seeks out opportunities for investing . currently , mark - jusbasche is considering alternative - energy and water - technology companies . a farm girl from missouri , she has one investment focus that ' s especially dear to her heart : looking into expanding her cattle ranches . she now owns 15 acres in new mexico . ` ` i ' m doing things that are fun , interesting , and important to me - - family and community , ' ' she says . sure beats being anywhere near enron .
photograph : mark : now just a bystander photograph by brett coomer / ap / wide world
copyright ? 2000 dow jones & company , inc . all rights reserved .
companies & finance international - enron still optimistic of averting financial meltdown .
by andrew hill and sheila mcnulty .
11 / 26 / 2001
financial times
( c ) 2001 financial times limited . all rights reserved
enron said yesterday it was still expecting outside investors to inject $ 500 m to $ 1 bn into the group , as talks continued to avoid a financial meltdown at the energy trading group .
dynegy , whose rescue bid for its houston rival is crucial to enron ' s survival , spent last week ' s thanksgiving holiday and the weekend reviewing enron ' s operations and finances .
dynegy said it remained " optimistic for the potential of the merger to be completed , and in the time - frame we originally announced - six to nine months " .
enron ' s fate depends on a delicate , unofficial pact between its lenders , dynegy , and credit ratings agencies , which have resisted downgrading the group ' s debt while the deal is pending .
if the pact stays in place , at least $ 500 m is likely to be invested in enron by jp morgan chase and citigroup , enron ' s key lenders and advisers . a further $ 500 m is being sought from private equity firms .
but if dynegy pulls out of the deal , the cash infusion could be put in jeopardy and the ratings agencies could downgrade the debt to junk , triggering debt repayments across a network of partnerships and off - balance - sheet vehicles linked to enron .
enron confirmed yesterday that it was still seeking additional liquidity from new equity investors , but would not discuss their identities .
enron ' s crisis of confidence became more acute last week when the shares fell from $ 9 to $ 4 . 74 following a regulatory filing that revealed the extent of the group ' s debt burden .
completion of a $ 1 bn secured credit line from jpm chase and citigroup , and the postponement of a $ 690 m notes repayment due tomorrow were not sufficient to prop up the share price . the bonds also fell to levels consistent with a potential bankruptcy filing .
the slide in the share price has encouraged speculation that dynegy is preparing to renegotiate its all - stock bid , now worth $ 9 . 3 bn , compared with enron ' s market value of $ 3 . 5 bn .
but people close to enron say renegotiation of the deal would not in itself have any impact on the energy group ' s finances . latest news , www . ft . com / enron .
( c ) copyright financial times ltd . all rights reserved .
http : / / www . ft . com .
copyright ? 2000 dow jones & company , inc . all rights reserved .
schwab chief ' s main theme : diversification
by lynnette khalfani
dow jones newswires
11 / 26 / 2001
the wall street journal
( copyright ( c ) 2001 , dow jones & company , inc . )
new york - - more than two months after the sept . 11 terrorist attacks , many investors remain edgy . but the stock market , after an initial selloff , has shown remarkable resilience .
few observers expect stock - market volatility to subside soon . still , experts say that now , more than ever , is the time for skittish investors to keep their wits about them .
in a recent interview , charles r . schwab , chairman and co - chief executive of charles schwab & co . , the san francisco - based online and discount brokerage firm , gave his views on what investors should be doing - - and what mistakes they should avoid .
here are some excerpts from the interview :
in the wake of the sept . 11 attacks , how much more risk , if any , do you think is in the financial markets ? or do you think it ' s just that people ' s perceptions about risk have changed ?
i ' ve been investing since 1959 , and i have to say that , year after year , the risk hasn ' t changed . the risk is always there . there ' s risk in investing in stocks , bonds and even u . s . treasuries because of interest - rate [ fluctuations ] . there ' s risk in real estate , too .
so the question is : how do you handle it ? the best way is to diversify . over a long period of time , people who diversify their investments do pretty darned well . when they don ' t . . . sometimes it ' s fatal . if the only stock an investor owned was enron . . . or cisco at 70 , that was pretty fatal .
what do you say to people who say they ' re too scared to invest right now ? that because of the threat of terrorism , the anthrax scares , the war in afghanistan , the recession , and so forth , there ' s just too much uncertainty in the markets ?
i remember back during the cuban missile crisis , we all feared the worst . we were all building bomb shelters . it was a scary time . this terrorist thing is no different . it ' s awful - - particularly for our children . but this country is so wealthy , in terms of its resources , intellectual capital and the strength of our government .
there is no more uncertainty today than in times past . for example , we ' ve had many recessions . it ' s not fun , especially when you begin reading about all these layoffs . in fact , i think the unemployment rate [ now at 5 . 4 % ] pretty easily might get to 6 . 5 % before it gets better . and it probably won ' t get better until march or april . also , the stock market will go up , hopefully before the economy goes up .
there ' s $ 2 trillion sitting in money - market accounts . that ' s a huge resource and buying power that ' s definitely available for new investments .
what do you think is the biggest mistake investors have made over the past two or so months ?
they let their emotions take over . with the fear that people had , they didn ' t use their rational thinking . they used their emotional thinking . [ after sept . 11 ] , they sold at the low , and fear was the driver .
just a year and a half ago , the driving emotion was greed . you ' re not going to avoid this stuff . so the issue is how you manage through these cycles of fear and greed . even when i ' m fearful of something , i say to myself : " this is still the time to invest . "
my biggest worry right now is that people will give up and say , " i just don ' t want to be in the stock market at all . " and it ' s just the time that people should be hanging on and keeping a diversified portfolio .
some other mistakes : a lot of people hang on to the stock that was the poster child of the last cycle . or people say , " i ' ll get back in [ the market ] when i see the economy turn around . " well , by the time they see that , it ' s too late . they will have missed the whole ride back up .
copyright ? 2000 dow jones financial desk
enron pursuing a cash infusion energy : company is seeking as much as $ 1 billion as it tries to shore up its endangered acquisition by dynegy .
from bloomberg news
11 / 26 / 2001
los angeles times
home edition
c - 2
copyright 2001 / the times mirror company
houston - - enron corp . said talks are continuing with potential investors for an infusion of as much as $ 1 billion as the biggest energy trader tries to avoid a collapse of its planned purchase by dynegy inc .
an investment would ease concern that enron ' s weakened finances may prompt dynegy to pull out of or renegotiate the terms of the transaction , which is valued at $ 23 billion in stock and assumed debt .
enron is seeking an additional $ 500 million to $ 1 billion in cash but wouldn ' t divulge details . " we are not going to discuss the particulars of who we are talking to , " enron spokeswoman karen denne said sunday .
shares of the houston company fell by 48 % in the last three trading sessions on the new york stock exchange . at friday ' s closing price of $ 4 . 71 , the stock sells for less than half the $ 10 . 85 that dynegy is slated to pay in the acquisition . that ' s a sign investors are skeptical the transaction will go through as planned .
enron is likely to have approached kohlberg , kravis roberts & co . , blackstone group and carlyle group for a private equity investment , said industry analyst david snow of . net .
the firms have declined to comment .
in a conference call nov . 14 , enron chief financial officer jeffrey mcmahon said the company is in talks with several private investors and expects to receive $ 500 million to $ 1 billion from those sources .
on wednesday , enron got a three - week reprieve from lenders on a $ 690 - million note due this week , gaining more time to restructure its finances . dynegy chief executive chuck watson said he was " encouraged " by the commitment to extend the note payment as well as the closing of a $ 450 - million credit facility . he said dynegy remained committed to the purchase .
enron already received $ 1 . 5 billion in cash nov . 13 from chevrontexaco inc . as part of the dynegy buyout agreement . in return , dynegy received preferred stock and other rights in an enron unit that owns the northern natural gas co . pipeline . under the deal ' s terms , if dynegy and enron fail to merge , dynegy can acquire the pipeline company .
but barron ' s reported over the weekend that dynegy ' s right to the pipeline might be challenged by j . p . morgan chase & co . and salomon smith barney inc . , which accepted the asset as collateral for $ 1 billion in loans to enron .
dynegy spokesman john sousa declined to comment on enron ' s attempts to secure financing or whether more cash for enron is a condition of keeping the merger alive .
enron ' s dealings with affiliated partnerships have led to a federal investigation of the company , which restated its earnings and saw its credit ratings cut .
the company said in a securities and exchange filing a week ago that it has less than $ 2 billion in cash and credit lines left .
copyright ? 2000 dow jones & company , inc . all rights reserved .
dynegy optimistic that enron merger will succeed - ft
11 / 26 / 2001
dow jones international news
( copyright ( c ) 2001 , dow jones + 44 - ( 0 ) 20 - 7842 - 9345 ; sarah . spikes @ dowjones . com
copyright ? 2000 dow jones & company , inc . all rights reserved .
dynegy purchase prompts antitrust concerns , l . a . times says
2001 - 11 - 26 07 : 36 ( new york )
washington , nov . 26 ( bloomberg ) - - california attorney
general bill lockyer is examining dynegy inc . ' s proposed
acquisition of rival energy seller enron corp . for possible
antitrust violations , the los angeles times reported .
the california independent system operator , which manages the
state ' s electric grid , has asked federal regulators to ban dynegy
and other major power sellers , including mirant , and aes corp . ' s
williams cos . , from selling electricity at market prices in the
state , the times said .
throughout the state ' s power crisis , governor gray davis and
other officials accused dynegy , enron and other power companies of
withholding electricity and manipulating the cost of wholesale
power to gouge consumers , the times said .
enron is negotiating with bankers to restructure $ 9 . 15
billion in debt .
` ` i would hope that the people who look at the antitrust
implications would consider this one carefully , ' ' california state
senator steve peace , a democrat , told the times . ` ` if anything ,
dynegy would be in an even stronger position to be able to
manipulate markets than it was before . ' '
financial post : news
enron hopes for infusion of capital : seeks us $ 500 m as talks of dynegy merger continue
andrew hill and sheila mcnulty
financial times
11 / 26 / 2001
national post
national
fp 3
( c ) national post 2001 . all rights reserved .
enron corp . said yesterday it was still expecting outside investors to inject us $ 500 - million to us $ 1 - billion into the group , as talks continued to avoid a financial meltdown at the energy trading group .
dynegy inc . , whose rescue bid for its houston - based rival is crucial to enron ' s survival , spent last week ' s u . s . thanksgiving holiday and the weekend reviewing enron ' s operations and finances .
dynegy said it remained " optimistic for the potential of the merger to be completed , and in the time - frame we originally announced - - six to nine months . "
enron ' s fate depends on a delicate , unofficial pact between its lenders , dynegy , and credit ratings agencies , which have resisted downgrading the group ' s debt while the deal is pending .
if the pact stays in place , at least us $ 500 - million is likely to be invested in enron by jp morgan chase and citigroup , enron ' s key lenders and advisers . a further us $ 500 - million is being sought from private equity firms .
but if dynegy pulls out of the deal , the cash infusion could be put in jeopardy and the ratings agencies could downgrade the debt to junk , triggering debt repayments across a network of partnerships and off - balance - sheet vehicles linked to enron .
enron confirmed yesterday it was still seeking additional liquidity from new equity investors , but would not discuss their identities .
enron ' s crisis of confidence became more acute last week when the shares fell to us $ 4 . 74 from us $ 9 after a regulator filing that revealed the extent of the group ' s debt burden .
completion of a us $ 1 - billion secured credit line from jpm chase and citigroup , and the postponement of a us $ 690 - million notes repayment due tomorrow , were not sufficient to prop up the share price . the bonds also fell to levels consistent with a potential bankruptcy filing .
the slide in the share price has encouraged speculation dynegy is preparing to renegotiate its all - stock bid , now worth us $ 9 . 3 - billion , compared with enron ' s market value of us $ 3 . 5 - billion .
but people close to enron say renegotiation of the deal would not in itself have any impact on the energy group ' s finances .
copyright ? 2000 dow jones & company , inc . all rights reserved .
india ' s aditya birla not eyeing enron ' s stake in dabhol
11 / 26 / 2001
dow jones international news
( copyright ( c ) 2001 , dow jones dow jones newswires ; 91 - 11 - 461 - 9426 ; himendra . kumar @ dowjones . com
copyright ? 2000 dow jones & company , inc . all rights reserved .
the enron scandal
a v rajwade
11 / 26 / 2001
business standard
10
copyright ( c ) business standard
enron has always been recognised by other companies as best practice in risk management . it put in systems to manage risks on a real - time basis and had very strong management . " james lam , founder of erisk , a consulting firm .
as an occasional teacher and more regularly a student of the subject of management of price risks , i have been an admirer of enron ' s elaborate disclosure of its risk management practices . and yet , in a cascade of events over a period of just three weeks from mid - october , it lost two - thirds of its share value , became the subject of a us securities exchange commission ( sec ) investigation , and was taken over by a rival a third in size . ( latest reports create some doubt about whether this will go through . ) what went wrong ?
no , the events had nothing to do with dabhol . indeed , if , for us in india , enron will always be associated with the controversial power project , elsewhere it is likely become a case study for students of accounting , finance and general management . ( on second thoughts , even its indian adventures would make an excellent case study ! )
but first , a recount of what happened . after announcing on october 16 , without much explanation or transparency , that it has taken a charge of $ 1 . 2 billion against equity , enron ' s share price started tumbling . apparently , the charge was the result of some financial transactions , and the sec launched an investigation . the chief financial officer ( cfo ) , who was directly involved with the transactions , the company ' s treasurer and a couple of other senior officials were sacked .
perhaps most damagingly , enron revised its accounts from 1997 onwards , reducing profits by about $ 600 million and increasing debt by a somewhat similar amount . as a result , enron ' s credit rating was downgraded .
it seems the root problem was not in its basic business of power and gas trading , but in its investment activities controlled by the cfo . these comprised private equity , and enron ' s share in each of the investee companies was kept artificially below 50 per cent to avoid consolidation of accounts . to this end , outside investors were brought in and assured of equity in enron itself , should the value of the investee company ( ies ) fall below agreed threshold ( s ) .
all this was done to keep the losses in investments off - balance sheet , and mitigate their impact on reported profits . many other us corporations including j p morgan chase , which had large private equity investments , have suffered on this score ( see world money october 15 ) . enron wanted to avoid this and , last year , paid its since - dismissed cfo $ 30 million for his creative accounting genius .
incidentally , those enamoured of us gaap and its alleged superiority over the rest of the world should note that all these gimmicks were blessed by the company ' s auditors one of the big five firms , which was paid $ 25 million as audit fees and $ 27 million for other services by enron last year .
the restatement of the accounts from 1997 onwards became necessary as the enron management / board and the auditors were forced , on review , to admit that at least some of the transactions should have been on , rather than off , balance sheet . details of all the transactions in question are yet to come out , but what has come out is bad enough .
but this apart , a billion dollar hit for a company of the size ( $ 300 billion ) or cash flow ( $ 3 billion ) of enron is , by itself , hardly a death warrant . but it turned out to be just that for enron .
perhaps because it was too arrogant ? perhaps also because its accounts lacked transparency and their opaqueness ensured that investors ' confidence was always somewhat fragile ?
but there are two other points worth noting : the professionalism of equity analysts and whether the event restores somewhat the balance between trading and producing . as for the first , the professional analysts were surely aware of the opaqueness of the accounts , but few questioned the management aggressively on the subject . perhaps the stock was too glamorous and typified the spirit of the times trading assets was what the " masters of the universe " did , not the boring old business of producing oil or power or cars . the enron management itself was proud of the way it operated in its principal activity of trading in power and gas , with skilling , the former ceo , claming that " we are on the side of angels . we are taking on the entrenched monopolies . we are bringing the benefits of choice and free markets to the world . " ( the quotation is from an interview in businessweek , prior to skilling ' s inglorious exit from enron a couple of weeks before the bubble burst ) .
for the analysts , there was also safety in numbers . skilling claimed that " enron ' s operations are built around the integration of modern financial technologies and physical technologies " , bringing derivatives theory to trading in power and gas ! obviously , the fate of long term capital management has not led to more sober management of trading risks .
surely the role of " markets " should be to reduce the distance , and cost , between producer and consumer ? one does feel that there is something perverse in a society that values , in terms of compensation , the trader ( don ' t forget this is just a euphemism for the speculator ) over the producer whether in the bond , currency or power and gas markets . the markets and , indeed , greed obviously have a role to play , but surely the pendulum needs to swing a little bit to the left ?
copyright ? 2000 dow jones & company , inc . all rights reserved .
india ' s mehta comments on birla group offer to buy enron stake
2001 - 11 - 26 03 : 42 ( new york )
mumbai , nov . 26 ( bloomberg ) - - jaywantiben mehta , india ' s
union minister of state for power , comments on reports of aditya
birla group , which owns grasim industry ltd . , the nation ' s third -
biggest cement maker , bidding for enron ' s stake in dabhol power
co .
enron wants to sell its 65 percent stake in dabhol power ,
india ' s biggest foreign investment , at cost . the project is mired
in a tariff dispute over $ 64 million in bills that haven ' t been
paid by the maharashtra state electricity board , its only
customer , for eight months .
` ` one more bidder will increase competition , which is
welcome .
` ` any step in the national interest is good .
` ` cheap energy is always in the national interest since we
want to increase electricity generation and sell it at a
reasonable price .
` ` i can ' t comment on the time - frame of buying out the enron
stake until the legal wrangles are solved . once that ' s cleared ,
then we will try and clear the proposal quickly . ' '
- - gautam chakravorthy in the mumbai newsroom ( 91 - 22 ) 233 - 9027