The Last Straw to Crash Enron–A Failed Merger Case
Enron Corporation,as almost the most legendary scandal protagonist in the history of America,announced its bankruptcy in 2001,after the failure of being acquired by its competitor Dynegy.The American power giant finally collapsed as Dynegy stepped back for the$9 billion deal.The cancellation of the acquisition deal is believed to be the last straw to crash Enron(CNN Money,2001).This paper will discuss why Dynegy launched the merger and why it finally stopped the merger,with an analysis of the financial status of Enron from 1999 to 2002.
To reach a fast growth rate,Enron had expanded its business coverage to a series of different industries including power plants,oil pipelines,electricity plants,paper plants,and broadband services all over the world.As the cash flows drained and surprisingly large amount of debts of$618 million came out of the water in October 2001,Enron,the world’s largest energy trading company had faced its biggest crisis in stock market with constantly declining stock prices.The highest price of Enron stock had reached to over$90 per share,when consumers have credibly high confidence for the company,while as the scandal broke out,the fear spread out and the stock priced had decreased to$0.26.In this way,Enron was in desperate to seek merger or acquisition from others,so as to collect cash to cover the huge debts and maintain necessary operations.Dynegy,at this point,has announced to be willing to take over Enron as to access to the prized oil pipeline.Dynegy proposed a$9 billion stock deal for Enron and could pay Enron$1.5 billion in cash to relieve its financial dilemma(Glater,2002).Dynegy,an electric company based in America,was induced to take the risks of acquiring Enron,because of the Northern Natural Gas Pipeline,which was believed to be the most valuable assets of Enron,with a capacity to deliver 4.3 billion cubic feet of gas(approx.8%of the total output of America).If it could take over the prized gas pipeline,it would increase its range of business to most profitable market of the United States.
However,the risks of the acquisition cannot be underestimated.According to the financial statement of Enron,the company had a minus$917 net income in September 2001(Exhibit 5)(Sullivan,2002).As part of the acquisition,Dynegy needed to pay a$12.8 billion load debt,which excluded other debts and accumulated off that contributed to the major financial problem of Enron(Oppel and Sorkin,2001).Some analysts even remarked that the hidden debt amount could reach over 10 billion,which had exceeded the limited too much for the capability of Dynegy.As Dynegy announced the plan of acquisition,its stock prices have also become fluctuated–the price declined$3 from$33 per share in the day since the announcement.
Another reason that disengaged the acquisition could be the large difference between the two company’s businesses.Enron focused on the energy trading that adopted complex financial trading strategies,while Dynegy was more of a logistical player focusing on physical assets.As the two companies have opposite company culture and different business entities,it further increased burden on the acquisition decision.Moreover,Enron was criticized to intend to transfer the unprofitable assets to its buyers so as to cut the debts.
However,the most important reason leading to the abandon of acquisition is the downgrade of credit rating.Standard and Poor’s has downgraded the credit rating of Enron from BBB-to B-,which was its sixth highest junk rating(Sullivan,2002).The downgrade of credit rating revealed the risks of investing in Enron,which impeded its investors to fund Enron.And before the downgrading,Enron was reported to seek$1 to$2 billion from financial organizations to help conquer the cash flow deficits.Combined with the aids from Dynegy,Enron planned to go through the crisis with a chance.However,since the new credit rating came out,Dynegy stopped the merger and Enron lost the money source,which eventually led to the company to request bankruptcy.
In conclusion,Enron as a bankruptcy company with valuable physical assets could have been acquired by Dynegy,while due to its huge debts,low credit rating and a complex trade strategy,the firm was not able to survive from a possible acquisition as it has lost the confidence of investors.In this way,it could only cut off the employees,sell out the plants,depreciate its stocks,and depend on the exposure from Dynegy,JP Morgan and Citi Group to pay off the debts,which reminds today’s companies to earn profits in an ethical and sustainable way.
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