Commodities trading giant Enron Corp., one of the 20 largest companies on the planet, last week came perilously close to becoming a business-to-business burnout.
Concern over Enron's financial standing caused users of its online trading platforms to begin fleeing last week to rival sites. Meanwhile, analysts said the company's legendary IT savvy proved too ephemeral to slow its rapidly accelerating financial collapse and withstand an increase in competition.
The problems escalated Wednesday after Standard & Poor's Corp. downgraded Enron's stock to junk status. That spelled the end of a US$9 billion deal in which Houston-based Dynegy Inc. would have bought larger crosstown rival Enron.
Enron's stock price, which was as high as $90 per share in mid-2000 and $33.84 per share before its recent troubles began two months ago, closed at $0.26 per share on Friday.
Calls to Enron officials went unreturned. But analysts now expect a bankruptcy filing as a precursor to Enron either going out of business or attempting to reorganize itself.
Rapidly gathering troubles
Enron announced in October, with vague explanation, that it had taken a $1.01 billion after-tax charge against its earnings. The measure was taken "to clear away issues that have clouded the performance and earnings potential of our core energy businesses," said Chairman and Chief Executive Officer Kenneth L. Lay, without further elaboration.
A Securities and Exchange Commission investigation followed, along with more than a dozen investor lawsuits alleging that Enron concealed its debts in affiliate corporations to keep its stock price high.
Mike Heim, an analyst at A.G. Edwards & Sons Inc. in New York, said Enron's online trading activities were overexposed. One weakness, he said, was that energy traders were able to move to rival systems without much interruption, and Enron doesn't have enough cash reserves to cover its outstanding commitments.
"In Enron's case, it's a matter of trading off your reputation and your reputation alone," he said. "That's great when your reputation's good, and not so great when your reputation is bad."
Charlotte, North Carolina-based Duke Energy Inc. last week stopped trading with Enron, claiming that it has "$100 million in noncollateralized exposure" to the trading exchange, according to a statement issued by Richard J. Osborne, Duke's chief risk officer.
Atlanta-based IntercontinentalExchange Inc., a rival commodities marketplace, reported Thursday that its trading volume had risen 65 percent over the previous month, along with a 30 percent jump in users.
Just last year, Enron, which started as a natural gas pipeline company in the 1980s, was seen as the New Economy successor to FedEx Corp., American Airlines Inc. and Wal-Mart Stores Inc. - companies that leveraged IT in the 1970s and 1980s to redefine their industries.
The power of IT
"[Enron] was such a 'go, go, we're going to change the world' kind of place," said Jay Pultz, an analyst at Gartner Inc. in Stamford, Connecticut. "They really believed in the power of technology." And Enron rode that belief to a No. 7 ranking in the Fortune 500.
Although Pultz called Enron's technology infrastructure "first-rate," he added, "I think it raises some questions as to whether you can [successfully] be a pure [online] trading operation."
Fred Buehler, vice president for new business development at Eastman Chemical Co. in Kingsport, Tennessee, said his company still believes it can use technology to make it a bigger, broader enterprise. Still, he acknowledged that technology-driven services can't be a stand-alone offering.
Instead, Eastman Chemical hopes to leverage its core competencies with IT innovation, such as its Internet-based logistics service, ShipChem Inc., for the chemicals and plastics industries.
As analysts see it, Enron serves as an object lesson for anyone trying to build a private exchange: No matter how big you get, a crisis of faith will kill you.
Jeff Ridings, energy procurement manager at Atlanta-based United Parcel Service Inc., said Enron's collapse will make him think long and hard before he makes future online commodity purchases on behalf of the transportation and freight-forwarding company.
"It's one thing to play the matchmaker, but when Enron's credit starts being suspect, people will run from them like the plague. You can't do a forward deal with a credit-risky partner," Ridings said.