Collapse raises new doubts about B-to-B

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 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 26 cents 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 CEO 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 (see timeline below).

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, N.C.-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 in a press release 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 [Cover Story, Nov. 20, 2000].

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, Conn. "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, Tenn., 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.

For Commodities Trader Enron, a Fast, Downward SpiralThe death knell for Dynegy's purchase of larger rival Enron came last week when Enron's stock turned into junk.

The two Houston-based companies spent three weeks before that hashing out a deal that would have allowed Dynegy to acquire Enron and its highly coveted EnronOnline energy trading platform, the rocket that launched the latter firm into the corporate stratosphere.

Yet when Standard & Poor's downgraded Enron's stock to junk status, it accelerated $3.9 billion in debt payments, and Dynegy had no choice but to bail out of the merger, claiming an "adverse material change" in Enron's business standing.

Rick Nicholson, an analyst at Meta Group Inc. in Stamford, Conn., said Enron first created problems for itself when it branched out from energy trading into telecommunications bandwidth, water, and pulp and paper trading.

"They were flops, and suddenly Enron was trying to prop up all these failing businesses," Nicholson said. "As big as they were, they didn't have the cash to go around."

In a Computerworld story that was published on Nov. 20, 2000, Enron President Jeff Skilling even predicted that data network trading someday could be as big as Enron's then-$35 billion energy trading business.

Shareholder lawsuits now allege that Enron officials tried to hide losses in affiliate businesses.

Mike Heim, an analyst at A.G. Edwards & Sons, noted that it's a major problem when a company dependent upon trading market liquidity suddenly loses its ability to cover its assets.

"Enron always bought and sold energy to help create its liquidity," Heim said. "Now, because of its financial condition, it's lost that ability."

Enron's online trading platform went down last Wednesday after Dynegy pulled its offer. Trading resumed the following day.

"Enron's got to trade to stay in business, and they may not be able to pull it off," Heim said.

He said he expects that Enron will file for bankruptcy and then "fizzle out" as fights erupt over its technological holdings and natural gas pipelines.

Dynegy claims that it has the option to purchase Enron's pipelines for $1.5 billion, though that matter remains in dispute.

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