The Enron Success and Failure

In 1984, Kenneth L. Lay became the Chief Executive Officer of Houston Natural Gas Corporation, a pipeline operator. Soon after he took position, his firm merged with Internorth, another pipeline company. Lay became the CEO of the merged firm, and the name of the firm was changed to Enron. As deregulation of energy became more widespread (Lay influenced the rate of change) the mission of Enron widened to include the trading of energy contracts.

Shortly after the merger with Internorth, Lay hired the consulting firm, McKinsey & Co., to help develop a business strategy for Enron. One of the consultants assigned to the Enron study was Jeffrey Skilling. Lay subsequently hired Skilling to develop new business activities for Enron. Skilling successfully launched Enron's highly profitable business of trading energy derivatives.

Andrew Fastow was hired by Enron in 1990 from Continental Illinois Bank in Chicago and was appointed Chief Financial Officer (CFO) of Enron in 1998. Fastow was thought to complement Skilling's interests and abilities. Appointing Fastow as CFO was Enron's second biggest mistake (it probably would not have been made if the first mistake of allowing the departure of Rich Kinder had not been made).

The Year 2001

In the year 2001, Enron was the seventh largest US Corporation (based on revenues) and possibly would have been ranked larger if the revenues of all the subsidiaries and special-purpose entities (SPEs) were factored into the calculation. It would have been ranked much lower if trading transactions were not treated as revenue. Interestingly, Enron was ranked number five in the Fortune 500 listing for 2001, published in March 2002. But no matter where we exactly rank it, Enron was a large profitable corporation before October 2001. If we consider only the available public information as of August 2001, it was a very profitable corporation.

On 17 December 2001, the Enron Corporation filed an 8-K report with the Securities and Exchange Commission (SEC). It stated that on "December 2, 2001, Enron Corp. (the "Company") and certain other subsidiaries of the Company (collectively, the "Debtors") each filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York..."

Thus, in December 2001, Enron filed for bankruptcy. How did a seemingly healthy, profitable corporation transform itself into the biggest corporate scandal of the new millennium? The newspapers have reported extensively on the clienteles that have been harmed by the Enron collapse.

These include:

-Employees with 401-K plans heavily (or exclusively) invested in

-Enron stock;

-Employees who have lost their jobs at Enron;

-Employees and investors who held worthless Enron stock;

-Debtholders who owned debt that had lost most of its value (including bank debt).

But, the list of those affected greatly is much longer, including:

-Top management with reputations in shatters and significant reductions in wealth.

-Arthur Anderson - A once highly respected public accounting firm was struggling to stay afloat and subsequently was forced to shut down operations.

-Security analysts who recommended Enron stock.

-Bond rating agencies who had imperfect crystal balls.

-Politicians who accepted donations from Enron.

At the beginning of 2001, Enron's common stock was high compared to its earnings. How does a CEO manage a company whose stock is overvalued? Enron management chose to take actions that presented a sunny smile to the public while painful events occurred. There were some executives who, fooled by the firm's own accounting and financial tricks, actually thought things were bright.