|
|
Enron Mail |
Enron Slashes Profits Since 1997 by 20% --- Partnership Dealings Cited As Dynegy Talks Go On; Debt Ratings an Issue
The Wall Street Journal, 11/09/01 Does Enron Trust Its New Numbers? It Doesn't Act Like It The New York Times, 11/09/01 Surest Steps, Not the Swiftest, Are Propelling Dynegy Past Enron The New York Times, 11/09/01 Enron Admits to Overstating Profits by About $600 Million The New York Times, 11/09/01 Dynegy Halts Talks With Enron, Awaits Credit Rating (Update1) Bloomberg, 11/09/01 Enron adds up 4 years of errors Houston Chronicle, 11/09/01 Enron, Dynegy still talking merger Houston Chronicle, 11/09/01 A new energy crisis: If master market maker Enron goes down, this winter could be a truly chilling experience for North Americans.(Enron Corp. in danger of defaulting)(Brief Article) Maclean's, 11/12/01 ENRON IN CRISIS - Restated figures show how earnings were cut. Financial Times, 11/09/01 The Five Dumbest Things on Wall Street This Week TheStreet.com, 11/09/01 GLOBAL INVESTING - Shareholder-friendly companies outperform STUDY FINDS GIVING MORE POWER TO INVESTORS ... Financial Times, 11/09/01 GLOBAL INVESTING - Putting a value on a group under siege. Financial Times, 11/09/01 ENRON IN CRISIS - Lure of number-one spot sparks interest. Financial Times, 11/09/01 ENRON IN CRISIS - Rivals steady the Enron ship. Financial Times, 11/09/2001 FRONT PAGE - COMPANIES & MARKETS - Enron rescue deal talks drag on. Financial Times, 11/09/01 LEX COLUMN - Enron. Financial Times, 11/09/01 Enron Says Profit Was Overstated; Troubled Energy Firm Fires 2 More Officials The Washington Post, 11/09/01 Enron Restatements Don't Go Far Enough TheStreet.com, 11/09/01 WORLD STOCK MARKETS - Wall St surges as Europe takes lead from Fed AMERICAS. Financial Times, 11/09/01 Enron Reissues Financial Reports Energy: The company restates four years to clear questions related to a series of controversial partnerships. Los Angeles Times, 11/09/01 Small-Stock Focus: Visible Genetics, Net2Phone Slide As Finance Stocks Aid Russell 2000 The Wall Street Journal, 11/09/01 Enron may have to sell UK assets The Guardian, 11/09/01 Enron restates earnings as company confirms merger talks Associated Press Newswires, 11/09/01 Beware the company that does not tell all The Globe and Mail, 11/09/01 City - Enron crisis deepens as two top staff are fired. The Daily Telegraph, 11/09/01 Dabhol Pwr Mtg Focus On Tata, BSES To Acquire Enron Stake Dow Jones Energy Service, 11/09/01 Enron Meets Indian Lenders on Power Plant Stake Sale (Update3) Bloomberg, 11/09/01 Dhabol Power Confirms Enron In Talks With BSES,Tata Power Dow Jones Energy Service, 11/09/01 Officials try to salvage multibillion dollar Enron India project Associated Press Newswires, 11/09/01 India: Enron reverses stand, attends Singapore meet Business Line (The Hindu), 11/09/01 Canadian Pwr, Gas Mkts Benefiting From Enron's Woes Dow Jones Energy Service, 11/08/01 Uncertainties Cloud View Of An Enron-Dynegy Combination Dow Jones Energy Service, 11/08/01 Enron Earnings Drop CNNfn: Business Unusual, 11/08/01 Enron Shareholder Derivative Suit Filed PR Newswire, 11/08/01 Enron Curtails Activity In US Power,Gas Mkt Thu -Traders Dow Jones Energy Service, 11/08/01 IN THE MONEY:Enron Debacle Could Push Accounting Changes Dow Jones News Service, 11/08/01 Enron Slashes Profits Since 1997 by 20% --- Partnership Dealings Cited As Dynegy Talks Go On; Debt Ratings an Issue By Wall Street Journal staff reporters John R. Emshwiller and Rebecca Smith in Los Angeles and Robin Sidel and Jonathan Weil in New York 11/09/2001 The Wall Street Journal A3 (Copyright © 2001, Dow Jones & Company, Inc.) Enron Corp. reduced its previously reported net income dating back to 1997 by $586 million, or 20%, mostly due to improperly accounting for its dealings with partnerships run by some company officers. The disclosure, contained in a Securities and Exchange Commission filing, came even as the Houston energy-trading company continued its merger talks with rival Dynegy Inc. Dynegy, an independent power producer and utility owner, is looking at acquiring Enron for roughly $7 billion to $8 billion, people familiar with the talks say. However, those talks could also be influenced by whether Enron is further downgraded by major credit-ratings agencies. The total price being discussed would equate to about $10 an Enron share, barely above where the stock is currently trading and far below the level of even two weeks ago. As of 4 p.m. in New York Stock Exchange composite trading yesterday, Enron shares were down 7.1%, or 64 cents, to $8.41, a tenth of their 52-week high of $84.875. On the Big Board, Dynegy traded at $36.50, up $3.50. Shares of several energy-trading companies were up yesterday following a directive from federal regulators that the California state government pay an estimated $1.6 billion for past power purchases. In yesterday's SEC filing, Enron also made major adjustments in its reported assets, debt and shareholder equity back to 1997. For instance, for the three-month period ended Sept. 30, Enron lopped about $2.2 billion, or 19%, off shareholder equity, reducing it to a total of $9.5 billion. Previously, the company had disclosed a reduction of only $1.2 billion. The filing also said that Enron discharged Ben Glisan, the company treasurer, and Kristina Mordaunt, the general counsel of Enron's North America unit, in connection with investments they made in one of the officer-run limited partnerships. Until yesterday, Enron had insisted that Mr. Glisan wasn't associated with the officer-run partnerships. The company wouldn't explain why the the two had been discharged, and Mr. Glisan and Ms. Mordaunt couldn't be reached to comment. The SEC filing is the latest chapter in a crisis that has engulfed the nation's biggest energy-trading company during the past month. During that time, Enron has reported a big third-quarter loss, the replacement of its chief financial officer who ran two of the controversial partnerships, and an SEC investigation. The SEC filing raises further questions about Enron's accounting procedures and disclosure policies. Concerns over these matters are vexing investors and analysts, including those at major credit-rating agencies. The agencies downgraded Enron debt during recent weeks and have the company on review for further downgrades. Ralph Pellecchia, credit analyst for Fitch, said he couldn't predict what effect the SEC filing would have on Enron's credit rating, but he added that the document contained damaging disclosures. "It's bad," he said. The Enron SEC filing also raises questions about the conduct of its outside auditor, Arthur Andersen LLP, which reviewed the company's annual financial statements and certified them as consistent with accepted accounting principals. Because of all the accounting adjustments "the audit reports covering the year-end financial statements for 1997-2000 should not be relied upon," yesterday's SEC filing said. An Andersen spokesman called Enron's restatement announcement "an unfortunate situation" but said the accounting firm is "cooperating with the company . . . to bring resolution to these matters." He said he couldn't comment further because of client-confidentiality concerns. Among the accounting turnabouts, Enron said it had improperly accounted for two partnerships connected to Michael Kopper, a former managing director of the company's North America unit. The two partnerships were known as Joint Energy Development Investments LP, or JEDI, and Chewco Investments LP. As reported, Mr. Kopper managed the general partner of Chewco, which was formed in 1997. JEDI had been formed in 1993 by Enron in partnership with the huge California Public Employees' Retirement System, or Calpers. In 1997 Enron, which operated JEDI, bought out Calpers' interest for $383 million and immediately sold it to Chewco, according to the SEC filing. Almost all the money for Chewco's purchase came in loans from JEDI and an unnamed financial institution, whose loan was guaranteed by Enron. By having a supposed outside party in the form of Chewco as a partner, Enron treated JEDI as an unconsolidated affiliate and kept hundreds of millions of dollars of partnership debt off its balance sheet. Enron now acknowledges that treatment was wrong and that both JEDI and Chewco should have been consolidated starting in 1997. Taking that step retroactively resulted in a $396 million reduction in net income for the years 1997 to 2000, the SEC filing said. Mr. Kopper, who left Enron in July to run the partnerships, didn't return a phone call seeking comment. In the past, he has declined to be interviewed. Enron also retroactively consolidated some of the results of its dealings with a partnership called LJM Cayman LP. That consolidation reduced 1999 and 2000 net income by $103 million. LJM and a similar but much larger partnership, called LJM2 Co-Investment LP, were formed in 1999 by Enron's then-chief financial officer Andrew Fastow, who was replaced last month. The two partnerships were run by Mr. Fastow and Mr. Kopper, according to the Enron SEC filing and private partnership documents. Enron's SEC filing said the company believes that Mr. Fastow sold his interests in the LJM partnerships in July to Mr. Kopper. Mr. Fastow has declined to be interviewed. Several analysts said they were troubled that none of the earnings restatements were directly attributed to the much larger LJM2 partnership. Some also pointed to a sentence in the SEC filing that said "it is possible" that continuing Enron reviews will "identify additional or different information concerning these matters." As such, "there remains doubt about whether there is something else in the closet," said Brian Youngberg, energy analyst at Edward Jones in St. Louis. The Enron SEC filing gave new information about the effect on company earnings of transactions related to the LJM partnerships. Since 1999, those transactions produced $577.8 million in pretax earnings, despite a $711 million pretax charge in this year's third quarter due to the termination of deals with several LJM2-related entities. The filing also estimated that Mr. Fastow received more than $30 million from the LJM partnerships. --- Mea Culpa In the midst of talks to be acquired by Dynegy, Enron details accounting and other actions. -- Will restate its financial results from 1997 through the third quarter of 2001, reducing previously reported income by $586 million and boosting previously reported debt to $628 million at the end of 2000 -- Concedes three entities run by company officials should have been included in its consolidated financial statements, based on generally accepted accounting principles -- Fires Ben Glisan, managing director and treasurer, and Kristina Mordaunt, managing director and general counsel of an Enron division -- Establishes a special committee to review all transactions Source: the company Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. Business/Financial Desk; Section C Does Enron Trust Its New Numbers? It Doesn't Act Like It By FLOYD NORRIS 11/09/2001 The New York Times Page 1, Column 2 c. 2001 New York Times Company YOU'D be better informed if, instead of listening to what we say, you watch what we do.'' That excellent advice was not issued by Enron management, although it should have been. Instead it came more than 30 years ago from John N. Mitchell, President Richard M. Nixon's attorney general. Enron's restatement of earnings yesterday did not go far enough to allow investors to understand all of what went on during the company's many strange transactions with related parties. It is now consolidating the results of some of its off-balance-sheet creations, though what happened in the most important ones remains a mystery. But the restatement should, at the least, cause investors and Wall Street analysts to realize they have been fooled by so-called pro forma earnings, which leave out unpleasant realities and ignore accounting rules. In January, Enron told investors its ''recurring net income,'' as it calls its pro forma number, would be $1.70 to $1.75 a share this year. The company's share price rose to $82 when that forecast was made. Remarkably, Enron is still on course to hit that target. Yesterday's restatement raised its nine-month earnings figure by a penny, to $1.36. And yet Enron appears to be willing to sell out for about $10 a share, or less than six times its reported profits, which still appear to be growing. Why so little? The answer may be that Enron's board knows those numbers are not reliable measures of performance. Enron's failure to disclose more about the still unconsolidated subsidiaries is an indication that the unreleased facts would not be reassuring. And Enron cannot stay in business unless customers and investors believe it is financially solid. So it is willing to sell out for a fraction of what it appeared to be worth only weeks ago. Don't call it a takeover. Takeunder would be a better term. What set off Enron's collapse? It now appears to have been a mistake. Enron says it added $1 billion to shareholder equity in 2000 and early this year in error. The mistake did nothing to improve Enron's profits at the time, so it seems unlikely it was deliberate. Had the mistake not been made, the reduction in shareholder equity it disclosed last month would have been $200 million, not $1.2 billion. That reduction scared investors into believing that Enron's transactions with partnerships led by Andrew Fastow, its former chief financial officer, had been disastrous for the company. Now it appears they may not have been so bad. But that fact is not very important now. Enron's new disclosures indicate that perhaps 40 percent of its reported profits in 2000 came from dealings with the Fastow partnerships. Such profits may be legal under accounting rules, but there are good reasons to doubt how real they are. In fact, the accounting rule makers are even now pondering a question that may be important to Enron. The body charged with dealing with new accounting issues got a rush question on Oct. 23 -- the day before Enron ousted Mr. Fastow -- about the accounting on transactions at a hypothetical ''Big Energy Corporation'' where one subsidiary, a natural gas pipeline company, trades with another subsidiary, an energy trading entity. The question posed was whether a company can report profits made by one subsidiary while ignoring the losses of the other one. That company may or may not be Enron. Such games will not work anymore, at least for Enron. It needs to be acquired because its customers are not willing to believe even its revised numbers. Graph shows Enron share prices since Oct. 15. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. Business/Financial Desk; Section C Surest Steps, Not the Swiftest, Are Propelling Dynegy Past Enron By NEELA BANERJEE 11/09/2001 The New York Times Page 5, Column 1 c. 2001 New York Times Company The tortoise appears ready to overtake the hare. Until they confirmed yesterday that they were in merger talks, the Enron Corporation and Dynegy Inc. were rivals within the new, rapidly evolving deregulated power industry. Each embodied a sharply different approach to making money, attracting investors and winning over regulators. Enron thrived on risk, hurling itself into projects and businesses largely untested by others, earning along the way a reputation for innovation and the acclaim of the investors and analysts who now so angrily shun it because of its murky accounting. Dynegy is the slower, more cautious company, the younger sibling that carefully gleaned lessons from the example set by a brasher Enron. Dynegy's steady progress has now made it strong and solvent enough to contemplate a multibillion-dollar takeover of its erstwhile competitor. As one senior energy industry executive said, ''Enron's trying to hit more triples and home runs, while Dynegy tries for singles and doubles.'' Kenneth Lay, the Enron chairman and chief executive who built an empire from two troubled gas pipeline companies -- and whose influential friends include President Bush -- is the one who points to the bleachers. Dynegy's chairman and chief executive, Charles L. Watson, is less well known but is well respected among stock analysts. He also started small, nurturing his energy trading and generating company -- which had $33 billion in revenue for the nine months ended Sept. 30 -- from a natural gas trading concern he began in the mid-80's. When electricity markets around the United States were deregulated, the companies followed clearly divergent paths. Utilities no longer necessarily generated power, and they and their larger industrial clients looked for good deals on the power being sold on the new wholesale markets for electricity. Enron and Dynegy traded and marketed energy. Yet Enron sold most of the power plants it owned and focused mainly on financial transactions rather than the actual physical delivery of power, a strategy that made the company a lot of money very fast. Dynegy bought power plants instead and focused on being a reliable supplier of energy. It cashed in, too, on deregulation, but not as Enron had. It stuck to its core energy business as its archrival branched into overseas operations, retail power marketing, a water business and a broadband venture, most of which have gone badly awry. Mr. Watson said in an interview earlier this year that a string of power plant acquisitions had kept his company diversified and balanced. ''We need a little bit everywhere,'' he said. ''Enron is a financial player, but Dynegy is more of a physical player.'' If Enron's finances grew more confusing, Dynegy seemed to offer clarity. If Enron promised a lot, analysts said, Dynegy played up its accomplishments. Enron lobbied regulators and politicians very publicly, while Dynegy kept things quiet and discreet. ''Chuck Watson is a pretty straight-talking guy,'' said Christopher R. Ellinghaus, a Williams Capital Group analyst. Because Enron had such extravagant earnings promises to fulfill, some analysts said, it may have been tempted to hide its problems and losses with creative accounting. While Dynegy avoided such a path, no one really expects Mr. Watson to gloat about his company's new, larger stature. Enron may have been less a hare than a canary in the deregulation coal mine, and it is unclear who will take on that role now. ''Dynegy had what could be called a second-mover advantage,'' said Andre Meade, head of Commerzbank Securities' United States utility research. ''It seemed to be content to watch its larger rival up the street in Houston, Enron, go into a market. And if it was successful, Dynegy then could go in with less money and make it work.'' Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. Business/Financial Desk; Section C Enron Admits to Overstating Profits by About $600 Million By RICHARD A. OPPEL Jr. and ANDREW ROSS SORKIN 11/09/2001 The New York Times Page 1, Column 2 c. 2001 New York Times Company The Enron Corporation yesterday sliced more than half a billion dollars from its reported profits over the last five years, but its crosstown rival, Dynegy Inc., still appeared to be willing to acquire Enron, executives close to the merger talks said. Worries about how bond rating agencies would react to the merger delayed announcement of the deal, the executives said. But the failure to announce a deal -- as well as the profit restatement -- caused Enron's share price to fall. And volume in its core North American natural gas and electricity trading operation plunged 20 percent as other energy-trading companies, unnerved by Enron's financial distress, steered business elsewhere. The boards of the two companies tentatively agreed late Wednesday night to a deal in which Dynegy would acquire Enron for about $8 billion in stock, or roughly $10 a share. The deal would include an initial $1.5 billion cash infusion from ChevronTexaco, which owns 27 percent of Dynegy, and later an additional infusion of $1 billion. The sticking point to proceeding with the deal, according to the executives, is whether Enron's credit rating will be reduced to ''junk'' status by the major credit rating agencies in reaction to Enron's disclosures and its plan to be acquired by Dynegy. Dynegy and Enron have provided pro forma statements of what a combined Dynegy-Enron would look like and asked Standard & Poor's and Moody's Investors Service for an ''expedited review'' of the transaction. Dynegy and ChevronTexaco are also privately considering whether to offer a bigger cash infusion to buoy Enron's credit rating -- now just two notches from falling below investment grade -- if the agencies look askance at the current deal. The companies are hoping for a response within the next day or two, the executives said. The executives also said Dynegy was seeking further protections that would allow it to back out of the deal if new, adverse disclosures surfaced. Shares of Dynegy rose sharply yesterday, although it was not clear whether buyers believed that the company -- one-quarter the size of Enron, in terms of revenues -- was getting a bargain or that Enron's latest disclosures would lead to the deal's being abandoned. Dynegy rose $3.50, or 10.6 percent, to $36.50, gaining back all of the ground lost on Wednesday after news of the deal leaked. Enron shares fell 64 cents, or 7.1 percent, to $8.41. Less than a year ago, Enron traded for more than $84 a share, and the company was valued at nearly $70 billion. In a sweeping restatement of its profits, Enron said that its actual net income for the years 1997 to 2000 was $591 million less than it had reported on its financial statements. In a filing with the S.E.C., Enron also indicated that part of last year's reported profits came from transactions with partnerships controlled by Andrew S. Fastow, who was the company's chief financial officer until he was ousted Oct. 24. Enron said the transactions involving Mr. Fastow, which are part of the S.E.C. investigation, earned the former executive more than $30 million. The company also said it had fired its treasurer and the general counsel of one of its divisions, who both had invested in one of the partnerships. Any deal would also face long and complex reviews by federal and state energy regulators, who would have to sort out a range of competitive issues in the still-young business of wholesale natural gas and electricity trading. Among the agencies involved would be the Federal Energy Regulatory Commission, the Federal Trade Commission and the Justice Department. Some analysts expressed hope that Enron's financial straits would encourage regulators to clear any deal, to relieve government officials of the prospect of dealing with the potential collapse of the nation's dominant energy-trading company. Enron handles about a quarter of all power trading, and higher proportions in some important regional markets. ''If not for the dire condition of Enron today, we are not certain an Enron-Dynegy merger would be possible due to antitrust concerns,'' said Christopher R. Ellinghaus, an analyst at Williams Capital. ''However, the effective industry bailout that the merger would represent would probably lead to some leniency from the F.T.C., and would probably be looked at with some relief by the F.E.R.C.'' It was clear yesterday there would be opposition to the deal. ''If Dynegy and Enron were to get together, obviously the thing that would appeal to Dynegy would be to combine the trading function of the two entities, and that in itself would provide greater market power, not less market power,'' said Raymond Plank, chairman of the Apache Corporation, one of the largest independent natural gas producers, based in Houston. Mr. Plank said he hoped regulators would take a critical look at any deal. ''The thing they should take a look at is the concentration of market power that has led to excessive volatility, and as a result, once again is threatening North American gas producers.'' Enron's restated profits almost wiped out its net income in 1997, and reduced it for every year since. But the changes actually raised its reported profits so far this year by $5 million. The changes came largely from including results of two special purpose partnerships that it had treated as being independent -- companies called Jedi and Chewco, after characters in the ''Star Wars'' movies -- and of including a subsidiary of a partnership called LJM1. That partnership, and another called LJM2, were run by Mr. Fastow. The remainder of the earnings reductions, totaling $92 million from 1997 through 2000, came from what Enron called ''prior year proposed audit adjustments and reclassifications,'' which appear to have been changes previously recommended by Arthur Andersen, Enron's auditors, but not made because the auditors were persuaded the amounts were immaterial. Details of those charges were not disclosed, and Enron said it might further alter its reporting as a special board committee continues its investigation of the partnership transactions. ''This is an unfortunate situation,'' said David Tabolt, a spokesman for Arthur Andersen, which audited Enron's books in all the years in question. ''Issues have surfaced that have caused the company to restate its financial statements and advise investors that they should not rely on Enron's financial statements or our audit reports. We are cooperating with the company and its special committee to bring resolution to these matters.'' While the restated financial statements consolidated the results of two partnerships and the LJM1 subsidiary, they did not fold the entire LJM1 partnership or the LJM2 partnership into Enron's financials. It is not clear how those partnerships performed. Nor did they include some other related entities whose Enron-guaranteed debts have aroused concern among investors. Mr. Fastow, Enron's former chief financial officer, could not be reached for comment, his lawyer said. Enron's downward cascade began after it reported third-quarter earnings on Oct. 16. Its share price rose 67 cents, to $33.84, that day, as the company said its ''recurring net income'' had met analyst expectations, even though write-offs led to a net loss. In a conference call that day, Kenneth L. Lay, Enron's chairman, mentioned that the company had written down shareholder equity by $1.2 billion as it closed out its relationships with the LJM partnerships. In the following days, that figure became widely discussed as some investors concluded that the company had suffered a large loss that it was able to avoid reporting on the earnings statement. But Enron said yesterday that reduction should have been only $200 million, with the remaining $1 billion reduction simply reversing prior errors made in 2000 and early this year. Enron said it had set up procedures to monitor transactions with the LJM partnerships and assure they were proper. ''Whether these controls were properly implemented'' is being investigated by the special board committee, the company said. That committee has retained William McLucas, a former director of enforcement for the S.E.C., as well as accountants from Deloitte & Touche. The company had disclosed that Mr. Fastow was involved with the LJM partnerships, but it had not reported that any other Enron officials were involved. Yesterday it said that three officers of the company, as well as another employee, had invested in an LJM1 subsidiary in March 2000. The officers were Ben Glisen, the company's treasurer; Kristina Mordaunt, the general counsel of an Enron division; and Kathy Lynn, vice president of an Enron division. The company said Ms. Lynn no longer worked for Enron and that the company was ''terminating the employment'' of the other two. Some industry officials said yesterday that a deal with Dynegy was increasingly looking like a do-or-die prospect for Enron, as other energy-trading companies began to back away from the company and take their business to other trading companies. While Enron has a large network of natural gas pipelines and other profitable assets, by far its most valuable franchise is its energy-trading business in North America, which acts as an intermediary in more gas and electricity trades than any other company. Yesterday, volume in that business dropped 20 percent. An Enron spokesman said company traders attributed the drop to concerns about the S.E.C. investigation and the outcome of the merger talks with Dynegy. Enron also canceled a planned meeting with its creditors today in Houston, executives said. The agenda for the meeting had been an extension of its $3 billion credit lines, but the merger talks superseded that discussion. Photo: Dynegy's chief executive, Charles L. Watson, is respected among stock analysts. (Associated Press) Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. Dynegy Halts Talks With Enron, Awaits Credit Rating (Update1) 2001-11-09 06:48 (New York) Dynegy Halts Talks With Enron, Awaits Credit Rating (Update1) (Adds European share trading in fourth paragraph.) Houston, Nov. 9 (Bloomberg) -- Dynegy Inc.'s plan to buy rival energy trader Enron Corp. has stalled pending a credit review by Moody's Investors Service, people familiar with the talks said. Dynegy will probably walk away if Enron receives a ``junk'' credit rating, the people said. The proposed takeover, for about $8 billion in stock, hit a snag because of the threat of a downgrade that would trigger a cash crisis by forcing Enron to repay $3.3 billion of bonds early. Moody's and Standard & Poor's are considering lowering their ratings, which are two levels above junk. A rating below investment-grade would make it ``difficult if not impossible to raise new debt and would severely hamper their ability to trade,'' Jefferies & Co. energy analyst Paul Fremont said. Fremont doesn't have a rating on Enron's stock or bonds. Enron shares slid 39 cents to $8.02 in Germany. Enron spokesman Mark Palmer declined to comment. Dynegy spokesman John Souza declined to comment on the possibility of a downgrade by Moody's. Souza said talks with Enron on an acquisition were continuing. Bankers are lobbying Moody's to make a quick decision so an acquisition could proceed, according to the people. Moody's analyst Stephen Moore cut the company's rating to ``Baa2'' on Oct. 29, the second reduction in less than two weeks. At that time, Moore said he would be ``tracking very closely their wholesale volumes'' of energy trading. ``That will be the leading indicator of where the company is going.'' Lower Rating A reduction of Enron's credit rating after the company restated earnings to reduce net income by more than $500 million during the past 4 1/2 years will make it tougher to maintain trading relationships, said competitors and investors. Without an investment-quality rating, Enron would have to post collateral for trades, making it more difficult to do business, said Michael Morrell, president of the trading arm of Allegheny Energy Inc., a Maryland utility owner. ``It would be true for us, and I would think for many others,'' he said. Atlanta-based Mirant Corp., a top U.S. energy trader, has moved most of its trades away from Enron to other exchanges, such as the Intercontinental Exchange, a venture formed in March 2000 with other partners including BP Plc and Goldman Sachs Group Inc., Mirant spokesman James Peters said. The earnings restatement may also justify a credit downgrade, said Donald Coxe, who manages 78,000 Enron shares as part of the Harris Insight Equity Fund. ``This shows the company was run scandalously,'' he said. Investor concern is reflected in the decline in Enron's 7.88 percent notes that mature in 2003 in the past month. The notes, which were unchanged yesterday at 77 cents on the dollar, now yield about 27 percent. The debt was trading near 100 last month. Lawsuits An acquisition of Enron would make Dynegy the biggest energy trader and a leader in managing energy needs for commercial and small-industrial customers. The combined 2000 revenue of the two companies is $130 billion. Dynegy also would inherit shareholder lawsuits over the partnerships, and some troubled assets, including Enron's 65 percent stake in the $3 billion Dabhol Power Co. in India, owed $64 million by India's Maharashtra state, said Commerzbank Securities analyst Andre Meade. ``You buy a lot of fleas when you buy Enron,'' said Meade, who rates Enron ``accumulate'' and owns no shares. Dynegy may be content to hire away traders and build its own business, he said. ChevronTexaco Corp., which owns about 27 percent of Dynegy, is considering adding $1.5 billion to the transaction to help Enron. Dynegy shares rose $3.50 to $36.50 yesterday. --George Stein in New York, (212) 893-3934 or at Nov. 9, 2001, 12:30AM Houston Chronicle Enron adds up 4 years of errors Energy giant restates finances to account for lost $600 million By TOM FOWLER Copyright 2001 Houston Chronicle Ever have to fix an error in your checkbook when you get your monthly bank statement in the mail? Imagine the headache Enron Corp. is facing. On Thursday, the company admitted it's found a few errors, too -- close to $600 million in mistakes spread over the past 4 1/2 years. The energy giant said it is restating its finances as far back as 1997 to account for losses related to a number of complex partnerships, including several under investigation by the Securities and Exchange Commission. This includes a $586 million reduction in net income, an additional $2.5 billion in debt and a 77-cent reduction in earnings per share. Enron also said it has fired a number of employees who invested directly in the partnerships and is investigating if others had improper dealings. The announcements came on the same day the company confirmed it was in negotiations to merge with cross-street rival Dynegy Corp. Directors with both companies have been in round-the-clock meetings in recent days, hammering out a deal. The revelations, outlined in a document Enron filed with the SEC Thursday morning, shine a bit of light onto issues that for weeks have been cloaked in shadows and out of sight of Wall Street analysts and investors. That includes investment partnerships that led to a $1.2 billion loss for the company last quarter, as well as other deals formed by the company's former chief financial officer that may have been a conflict of interest. The company's reluctance to share detailed information on the partnerships since they first arose last month left many to assume the worst. Enron's stock price plummeted, credit agencies slashed its ratings and trading partners began to shop their business around to competitors. Enron chief executive Ken Lay said the release of information was aimed to calm the concerns of shareholders and federal investigators. For all practical purposes it came too late. "At the end of the day these details give support to the fear that Enron was a financial house of cards," said John Olson, an analyst with Sanders Morris Harris. "It would make a good case study on what happens when you fly too close to the sun." The turmoil started shortly after Oct. 16, when steep losses in Enron's third-quarter earnings drew renewed attention to a pair of investment partnerships created by former CFO Andy Fastow with the approval of the company's board of directors. The partnerships, called LJM1 and LJM2, were formed using Enron equity and outside capital as a way to hedge against the risks involved in some of the company's new lines of business, such as Internet broadband trading and water. They were also designed to help the company grow quickly without adding too much debt to its books or diluting the value of the company's stock. Fastow's dual roles as Enron CFO and managing director of the entities were a cause for concern for Wall Street because it would put him on both sides of some of the deals, representing both the buyers and sellers simultaneously. The company said it was careful to assure there were no conflicts of interest, but under pressure from investors Fastow resigned from those partnerships last summer. Fastow earned as much as $30 million through his role with the partnerships, while a number of other Enron employees also invested in them personally. Two of those employees -- Ben Glisan, a managing director and treasurer of Enron Corp., and Kristina Mordaunt, a managing director and general counsel of an Enron division -- were terminated by Enron this week. The other employees, including Fastow and executives Michael Kopper, Kathy Lynn and Anne Yeager, no longer work for Enron. While the transactions themselves do not appear to have been illegal, the way some of them were recorded in Enron's financial statements led to the corrections. Specifically, Enron said that special entities it created named Chewco Investments L.P. and Joint Energy Development Investments L.P. should have been consolidated back onto its books in November 1997. The LJM1 partnership should have been consolidated into the company's financial statements in 1999. While Fastow is credited with creating the strategy behind the complex financing deals, observers say the plans were reviewed and approved by Enron's board of directors and other officers. The results of all the deals and how they were recorded on the company's financial statements had to go through the office of Chief Accounting Officer Richard Causey and through Enron's accounting firm, Andersen. "You couldn't slip these things by anyone," Olson said. "They're simply too big, and too many people were involved for it to go unnoticed." Thursday's filing details some of the complex financing deals between Enron and LJM1 and LJM2. Enron formed LJM1 and LJM2 in 1999 with infusions of its own cash and stock. Other investors, such as pension funds and banks, also invested millions of dollars more into the partnerships. These investors included Credit Suisse First Boston, Wachovia, General Electric and the Arkansas Teachers Fund, among others. Fastow was managing partner of both entities. The idea behind LJM1 and LJM2 was for them to become sources of capital to buy assets from Enron, co-invest with Enron in certain projects and to take equity stakes in other companies to spread the risk of those businesses. Between June 1999 and September 2001 Enron and Enron-affiliated entities did 24 deals with LJM1 or LJM2 or both, ranging from buying and selling hard assets, purchasing debt or equity interests, and selling the rights to buy or sell shares of stock at certain preset prices. While Enron provided descriptions of the many deals on Thursday, their complexity can be mind-numbing for anyone who isn't an accountant. For example, in June 2000, LJM2 purchased fiber-optic cable from Enron that was installed yet unused for $30 million in cash and $70 million in an interest-bearing note, or IOU. LJM2 sold some of that fiber to other companies for $40 million, but since Enron helped market the fiber to those buyers it received an "agency fee" of $20.3 million. In December 2000, LJM2 sold the remaining fiber for $113 million to a special entity that Enron created strictly for the purpose of that purchase. LJM2 then used some of the proceeds from the sale to pay off the $70 million Enron IOU. As if the transaction weren't complicated enough, Enron then signed a contract with one of the investors of the entity that paid $113 million for the fiber to help cushion that investor from any potential losses. The transactions were completely legal and earned LJM2 $2.4 million and reduced Enron's credit risk on the transaction by $9 million. The fact that the earnings rely so heavily on business between such closely related entities is disturbing, however. "These intra-company transaction were totally exotic," Olson said. Christopher Ellinghaus, an analyst with Willams Capital in New York, said the revelations have made many "very alert to the shenanigans at Enron." "Enron just likes to be fancy," he said. "They may have been too fancy for their own good." Bottom of Form 1 Nov. 9, 2001 Houston Chronicle Enron, Dynegy still talking merger Smaller energy trader's shares up; analysts see it poised to profit By LAURA GOLDBERG Copyright 2001 Houston Chronicle Merger discussions between Dynegy and Enron Corp. continued Thursday as Wall Street had a mixed reaction to a possible combination of the two Houston energy traders. Investors traded up Dynegy's shares, while several stock analysts raised questions. Sources told the Chronicle Wednesday that the two companies were in advanced talks for the smaller Dynegy to buy out its troubled rival. A stock deal likely to be worth $7 billion to $8 billion was being discussed. In addition, ChevronTexaco Corp., which owns about 27 percent of Dynegy, could give Enron an immediate infusion of $1.5 billion to help stabilize its finances and keep its core trading business running smoothly. Dynegy, the people said, was offering a modest premium over Enron's stock price, but Enron had been pressing for a higher offer. Shares in Enron closed at $9.67 Tuesday, $9.05 Wednesday and $8.41 Thursday. Each company issued a statement Thursday saying the two were in discussions about "a possible business combination." Neither plans additional comments until a deal is struck or the talks fail. The statements came as Enron said it is restating its finances as far back as 1997 to include losses related to a number of complex partnerships it created, including several being investigated by federal securities regulators. Enron has been under heavy fire since Oct. 16, when it released third-quarter earnings that included losses related to two investment partnerships formerly run by its since-replaced chief financial officer. Carol Coale, an analyst with Prudential Securities in Houston, is to meet with top Dynegy executives today. She has a number of questions about a possible merger, including why Dynegy wants to buy Enron when its best resource, its people, could cross the street and turn in r?sum?s. She also wonders why Ken Lay, Enron's chairman and chief executive, is apparently willing to sell Enron at such a low price. "What does he know that we don't know?" Coale asked. But Coale also got the sense Dynegy executives are doing their homework and moving with caution, which she said is positive. A Dynegy buyout of Enron has the potential to be "highly accretive" to Dynegy's bottom line depending on the price paid, said Ronald Barone, an analyst at UBS Warburg in New York. "The new company would be a global powerhouse," he said. "There are significant synergies that can be realized to enhance value." Shares in Dynegy closed up $3.50 Thursday to $36.50. Investors liked two opposite prospects, said Jeff Dietert, an analyst with Simmons & Co. International in Houston. On the one hand, investors see potential for Dynegy to add profits by buying Enron, he said. But if no deal happens, they also see a chance for Dynegy to take business away from a weakened Enron. He expects any deal Dynegy signs to give it an escape if the Securities and Exchange Commission should conclude Enron acted illegally. Government regulators would have to review a merger, looking to see if too much market concentration would result. With a merger, Dynegy would increase its trading and marketing share in the North American natural gas market from about 6 percent to about 21 percent, said John Olson, an analyst with Sanders Harris Morris in Houston. For electricity, Dynegy's numbers would go from about 6 percent to about 23 percent, he said. Andre Meade, an analyst with Commerzbank Securities in New York, doesn't believe regulators would find a market concentration problem. "It's a pretty fractionalized industry with plenty of competition," he said. Meade called an Enron-Dynegy merger "a mixed bag," as it would let Dynegy cut costs and lead the energy trading market. "However, I don't think it's as easy as it sounds," he said, adding that a successful merger would take the correct incentives to convince Enron's traders to work for the new company. "Whenever you merge with or buy a human-capital-based business, it's risky." Bottom of Form 1 A new energy crisis: If master market maker Enron goes down, this winter could be a truly chilling experience for North Americans.(Enron Corp. in danger of defaulting)(Brief Article) DONALD COXE 11/12/2001 Maclean's 33 Copyright 2001 Gale Group Inc. All rights reserved. COPYRIGHT 2001 Maclean Hunter Canadian Publishing Ltd. Do the sustained bear raids on Enron Corp. portend chaotic conditions in the energy markets? That is the $64-billion question. Bearish stock markets are the indispensable scavengers of capitalism. They clean up the financial and economic landscape and kill off disease-carrying pests. True believers in free markets should rejoice when bears rush in after a prolonged period of misbehaviour has fouled the financial environment. Those of us who thought the energy industry would escape the great technology bear market may have been too complacent. In recent weeks, the biggest loser on the New York Stock Exchange has not been a tech stock, but Enron, a component of the Dow Jones utilities index. Enron's high was $89.06 a share, and as recently as August it was trading at $45. In recent weeks, Enron's shares have plunged, closing last week below $12.33 That collapse has sent shock waves through the capital markets. What may be even more significant for energy producers and users is the valuation of Enron's bonds: they are trading at distressed prices, offering yields comparable to junk bonds. The ratings services have turned highly negative on Enron, although they still rate it an investment-grade credit. (I regret -- oh how I regret! -- that I must disclose before proceeding further that investment funds I manage have, at this writing, exposure to Enron stock, acquired at prices substantially above current markets.) For Canadians unfamiliar with Enron and its place in U.S. energy markets, here is an introduction: Voltaire summed up the entire 18th- century deistic proof of the existence of God by saying, "If God did not exist, it would be necessary to invent him." It's the same with Enron. U.S. energy markets needed a prime mover. Prior to Enron, these markets (other than crude oil) were relatively primitive and inefficient. Neither producers nor consumers had means to hedge their risks effectively, and long-term contracts were made -- if at all -- under circumstances of grossly inadequate information. The futures market for natural gas was spotty and unreliable, and no futures market for electricity existed. Enter Enron. In the past half- dozen years, Enron became the greatest trading house for energy in the world. Its willingness to make markets in energy futures in almost any amount transformed the markets for electric power and gave natural gas producers and consumers reliable hedging and financing opportunities, day in, day out. By putting its own capital on the line to make trades, Enron created depth, liquidity and transparency in energy markets. So active were those markets that they gave price signals to all who would follow them. Conspicuous among those who didn't were the policy-makers in California. Had Gov. Gray Davis and his top officials followed the developments in electricity futures, they would have realized the real nature of the risks facing consumers in the Golden State. Instead, they let a crisis develop, and then locked in long-term purchase contracts at all-time record-high prices just before they collapsed to normal levels. By some estimates, Enron is on one side or the other of 25 per cent of all outstanding futures contracts in natural gas and electricity. Since these contracts extend years ahead, and since the other parties to those trades are relying on Enron's ability to cover its obligations, the risks to energy prices and supplies could be enormous if Enron were to default. That still seems extremely improbable. Contracts executed through the public futures markets have the financial protection of those exchanges for Enron's "counterparties" (the term for the other side of a futures contract). But Enron has enormous exposure through direct deals that have no such protection. What has hammered Enron's securities lately is the unfolding story of gigantic off-balance-sheet deals the company made with partnerships that included, astonishingly enough, the chief financial officer, who was finally forced to go on leave. These partnership deals were never really disclosed, except in obscure balance sheet notes that gave no indication of the scale of the deals or that a senior company officer was involved. Why should investors who aren't owners of Enron stock or bonds care? Because the past year has seen the biggest swings in natural gas and electricity prices in history, and some observers wonder whether Enron's internal problems exacerbated those swings. Worse, if Enron has to withdraw from the markets, what about the billions in forward hedging contracts that producers and consumers have in place? Many U.S. energy producers locked in high prices by making huge forward sales. If those contracts are voided, defaults could spread through the system, throwing energy markets into chaos. There were enough problems in the energy-short U.S. even when Enron was keeping the markets functioning. If the master market maker goes down, or is forced to curtail its operations, this winter could be a truly chilling experience for North Americans. When Bush and Cheney aren't worrying about bin Laden or anthrax, they may be worrying about Enron. Donald Coxe is chairman of Harris Investment Management in Chicago and Toronto-based Jones Heward Investments. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. ENRON IN CRISIS - Restated figures show how earnings were cut. By ROBERT CLOW. 11/09/2001 Financial Times © 2001 Financial Times Limited . All Rights Reserved ENRON IN CRISIS - Restated figures show how earnings were cut - SEC FILING - Energy trading group admits that several of its special-purpose entities should have been consolidated on the balance sheet. Enron yesterday marked four years of earnings down sharply after taking account of off-balance-sheet dealings. The company admitted that several of its off-balance-sheet, special-purpose entities should have been consolidated on its balance sheet. The effect of the change was to reduce earnings substantially in each year from 1997 to 2000; from $105m to $9m in 1997, from $703m to $590m in 1998, from $893m to $643m in 1999 and from $979m to $847m in 2000. This year's earnings were marginally increased but the company's third-quarter loss widened marginally from $618m to $635m. In the Securities and Exchange Commission filing, Enron also announced the dismissal of two more officials: Ben Glisan, the company's treasurer, and Kristina Mordaunt, general counsel for one division. Enron ran into trouble on October 16, when it announced a $1.2bn reduction of shareholders' equity and a $1.01bn charge. Yesterday's filing goes some way to explaining how the charge came about. Enron attributed the charge to dealings with LJM, a private equity fund run by Andrew Fastow, formerly Enron chief financial officer. Private equity investments have injected enormous volatility into the earnings of companies, such as JP Morgan Chase. Keeping LJM off the balance sheet allowed Enron to avoid major swings. But to prevent LJM being consolidated, Enron had to own less than half of the special-purpose vehicle, and for outside investors to participate they had to be compensated. What that meant was that when the value of Enron's private equity investments fell below a certain level, people familiar with Enron's balance sheet said, co-investors would receive Enron stock. The Enron filing reveals that the LJM losses arose from another group of special-purpose entities, known as the Raptor vehicles, which were designed in part to hedge an Enron investment in a bankrupt broadband company, Rhythm NetConnections. The $1.2bn reduction in shareholders' equity arose from the termination of the Raptor hedging arrangements, which if they had continued would have resulted in Enron issuing 58m shares to offset the company's private equity losses. Enron also revealed that Mr Fastow was paid in excess of $30m as a result of his role in running LJM. At issue is whether Mr Fastow was acting in the best interests of other Enron shareholders. The filing also raises questions about Enron's cash flow, which will be studied carefully by the rating agencies and creditors. A group of banks, including Barclays Bank, Credit Suisse First Boston, Deutsche Bank, JP Morgan Chase and Citigroup, have lent more than $4bn to Enron over the last weeks, much of it not collateralised. By reducing its earnings by more than $100m for several years, Enron has created concern about its ability to service debt. On the balance sheet, Enron owes $12.8bn. Off-balance-sheet entities related to Enron owe $8bn-$9bn. Enron generates about $3bn cashflow annually, but despite claiming to be cashflow-positive, its borrowings rose significantly last year. © Copyright Financial Times Ltd. All rights reserved. http://www.ft.com. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. The Five Dumbest Things on Wall Street This Week By K.C. Swanson <mailto:kcswanson@thestreet.com< Staff Reporter TheStreet.com 11/09/2001 07:09 AM EST URL: <http://www.thestreet.com/markets/dumbest/10003700.html<; 1. Mangia, Mangia! Er -- Scratch That The Securities and Exchange Commission has suspended trading in 2DoTrade (TDOT.OB:OTC BB - news - commentary) , doubting the company's claim that it is prepared to distribute a disinfectant for anthrax. No wonder the agency is skeptical: Biotechnology seems a bit far afield from 2DoTrade's goal of developing a business-to-business platform for the African continent. It's even farther removed from the company's original mission: According to a report filed with the SEC, it wanted to start a chain of full-service, white-tablecloth Italian restaurants "based on authentic Italian regional recipes." That plan was abandoned last spring. In the meantime, it still has no revenue. 2DoTrade says it has cumulative losses of $29,000 because it's still in the development stage. A report on its Web site suggests the stock is "an exceptional ground-floor opportunity [for the] investor with vision." But the SEC has publicly questioned the company's prospects, the existence of its alleged contracts, and the identity of its managers. 2. Treasury Department At It Again Chalk up one more blunder for the Treasury Department. In the current fiasco, the SEC has said it's investigating the early release of news that the Treasury Department would stop selling 30-year bonds. The Treasury apparently screwed up on two counts: Not only did it allow the news to leak out early through a third party (a consultant who attended a department briefing without press credentials), but it also posted the information on its own Web site before it was publicly announced. So it can't simply blame the premature disclosure on someone else's bad judgment. Disclosure of the mistake is sure to further annoy bond traders, who were already piqued that the government had given no hint at the policy shift. According to press reports, many bond trading desks suffered big losses because they were caught unawares. 3. It Doth Protest Too Much Hewlett-Packard's (HWP:NYSE - news - commentary) affirmation of "enthusiastic support" this week for the merger with Compaq (CPQ:NYSE - news - commentary) rings a bit hollow, given that H-P's stock has seen double-digit losses since the merger was announced. The board's recent frozen-smile commentary came on news that some of the company's most influential investors, members of the Hewlett and Packard families, oppose the deal and will vote against the merger if given the chance. The move by H-P heirs was all the more damaging because they control a large chunk of stock: According to press reports, the Hewletts own over 5%, while an institute affiliated with the Packard family holds more than 1%. Even before the family members weighed in, investor disapproval of the merger was manifest. As TSC has reported, stocks of both companies have dropped sharply after the deal was announced, slicing $6 billion off the deal's initial value of $25 billion. But after news that the Hewlett family would oppose the deal, cheered investors bid up H-P 17% in just one day. It's not often that the board of a company and its investors are at loggerheads -- and regarding the board's mood, we're reckoning panic might be more accurate than enthusiasm. 4. NYSE Lagging In Surveillance Two years after the NYSE was embroiled in an illegal trading scandal, oversight of floor brokers is still too lax, according to government regulators. Their report, released to members of a congressional committee in September, was made public this week. It says the Big Board has made "significant progress" in regulating brokers, but deficiencies remain: Among other things, the NYSE needs to improve surveillance of floor members, ensuring that regulators are on the trading floor to watch for potential violations. In 1999, nine brokers pleaded guilty to criminal charges related to schemes in which they took a share of trading profits. At least 64 brokers took part in profit-sharing arrangements until 1998, according to the SEC. No doubt the NYSE's regulatory improvements are commendable -- just hope it doesn't take another two years for the exchange to get its practices completely up to par. 5. Enron, Once Again Enron (ENE:NYSE - news - commentary) to shareholders: "Heyyyyyy, guys? You know all those financial statements we've been giving you for the last five years? Uhh ... they were totally wrong. Sorry." Yes, just when it seems Enron has exhausted its considerable reserves of dumb things, the company surprises and produces yet another. This time Enron announced it would restate earnings from 1997 through the second quarter of 2001. "Financial statements for these periods ... should not be relied upon," the company said, in a statement likely to obliterate any lingering vestiges of credibility. The adjustments to its financial statements reduced profits over the period by a total of over a half-billion dollars, while the accounting changes magically produced an additional $2.59 billion in debt. The announcement comes amid reports that Dynegy (DYN:NYSE - news - commentary) is in talks to buy Enron. With Enron's stock down about 90% from a year ago, at least it's likely to be cheap -- though it would be a stretch to call it a bargain under these circumstances. GLOBAL INVESTING - Shareholder-friendly companies outperform STUDY FINDS GIVING MORE POWER TO INVESTORS ... By ALISON BEARD. 11/09/2001 Financial Times © 2001 Financial Times Limited . All Rights Reserved GLOBAL INVESTING - Shareholder-friendly companies outperform STUDY FINDS GIVING MORE POWER TO INVESTORS HAS PRODUCED BETTER RETURNS THAN PROTECTING MANAGEMENT. Companies that protected management rights with poison pills, classified boards and other anti-takeover tools significantly underperformed businesses that gave more power to shareholders through the 1990s, according to a new study. A survey of 1,500 companies found that those with the most pro-management provisions generated annual returns that were 8.5 per cent less than companies that favoured outside investors. "There are broad variations across companies as to whether they are democracies or dictatorships," said Andrew Metrick, a finance professor at the Wharton School of Business, who wrote the study with Paul Gompers and Joy Ishii of Harvard University. "What we found was that the democracies did better." After the takeover craze of the 1980s, companies scrambled to enact provisions that would help executives defend against corporate raiders. Typical provisions included poison pills, which allow all pro-management shareholders to buy stock at discounts during takeover attempts diluting the power of the hostile bidder; super-majority votes, which require from 66 to 85 per cent approval for a management change rather than a majority; golden parachutes, which give large compensation packages to executives who are fired or demoted; and classified boards, whereby board members' terms are staggered, preventing them from all being ousted at the same time. The stock market downturn and well publicised cases of corporate mismanagement, including this month's Enron controversy, have made investors increasingly wary of such pro-management stances. Last week, California Public Employees Retirement System, the largest US pension fund, won its fight to declassify the board of Metromedia International Group, the emerging markets communications company. This week the fund is discussing Enron. Other investors in the energy merchant have already filed law suits against company officials, alleging fraud and seeking to recover their lost share value, estimated at $20bn over the last month. Hewlett-Packard shareholders were also asserting their rights this week. The Hewlett family, which still holds a 5 per cent stake in the computer company, announced it would oppose management's plan to merge with Compaq. Mr Metrick's study lists HP as one of the most shareholder-friendly companies in 1990 among the 1,500 he evaluated. Companies were given one point for every by-law that reduced shareholder rights. Aside from HP, those with the lowest scores - or highest level of shareholder power - were IBM, Wal-Mart, DuPont, PepsiCo, American International Group, Southern Company, Berkshire Hathaway, Commonwealth Edison, and Texas Utilities. The companies with the highest - or most pro-management - scores in 1990 included GTE, Waste Management, General Re, The Limited, NCR, Kmart, United Telecommunications, Time Warner, Rorer and Woolworth. From 1990 to 1999, the first group outperformed the Standard & Poor's 500 by 3.5 percentage points each year from 1990 to 1999, the second group trailed the index by about 5 points. An investor who bought the pro-shareholder stocks and sold short the pro-management stocks could have captured that 8.5 per cent difference. The study also found that the pro-management companies had lower sales growth and less profits than other firms in their industry. However, Mr Metrick stresses that the findings do not prove causation. Strong management provisions do not necessarily undermine stock performance, nor do shareholder rights always lead to better returns. "What we do know is that companies that gave shareholders rights did better than those that didn't in the 1990s ... so maybe if the companies that don't give shareholder rights gave them, their stock would do a lot better going forward," he said. "Maybe investors should be looking for that change. But that is the question the paper doesn't answer." © Copyright Financial Times Ltd. All rights reserved. http://www.ft.com. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. GLOBAL INVESTING - Putting a value on a group under siege. By JOHN DIZARD. 11/09/2001 Financial Times © 2001 Financial Times Limited . All Rights Reserved Risk arbitrageurs, the people who bet on the price and likelihood of mergers and acquisitions taking place, need nerves of bomb disposal experts. They need to know more than the public about deals and potential deals that usually attract a lot of interest from the media and other analysts, which means getting an edge is harder than with non-deal stocks. The planned acquisition of Enron by Dynegy is a case in point. The deal is "subject to" the usual conditions - the SEC, antitrust authorities and, of course, the due diligence work on the valuation of the underlying assets and businesses. But buying Enron stock in the hope that the valuation will turn out to be above the present price may be a slightly ambitious strategy for even the most well informed investors. The book value of the company is supposed to be about $11bn, which would be a couple of bucks higher than the current stock price. And the ultimate purchase price should - repeat, should, not must - be above that book value. However, in any company where the financial managers of a week ago are not only on the street but under invest-igation, you have to wonder if a "take-under" at a low stock price is a possibility. Nevertheless, all the panic had spread from the febrile world of equities to the normally less excitable one of bonds, which has created a much lower risk opp-ortunity. For example, the Enron 7 7/8 per cent bonds of 2003 were trading yesterday with bids in the high 60s and offers in the low 70s. That represents a yield to maturity of 22 per cent - not
|