By Ben Dell’Orto, IAC Student Intern Fall 2018
As described in the last post, everything seemed with Enron generally seemed fine on the outside. For a time, it was.
Enron began as a through the merger of two natural gas companies. As the industry changed and deregulated, there was opportunity for more profit, but there was also volatility in prices. This resulted in a strategy in which it created a gas “bank” to avoid the volatility, much like actual banks.
Later, Enron began diversifying, introducing several new products it tried to manage under the same model, such as electricity, oil, water, and broadband. While gas and oil continued to do well, most of Enron’s other investments did not perform well. In order to continue growing its stock, the business attempted to fool investors into believing money continued to roll in.
To do this, Enron essentially began counting money before it had it. Enron’s accountants valued their business based on their predictions of how much money the business would make over the course of long-term contracts such as its twenty-year deal with Blockbuster.
The problem with this is that these predictions were often inaccurate and resulted in the company being overvalued. Continuing to expand the company through more and more deals, which were valued at more than they were actually worth, allowed the company to pretend to have a tremendous value itself.
Enron also used shell companies to hide its debt. Enron could create subsidiaries which it would use to make purchases, while hiding the debt from investors.
If these sound like sketchy business practices to you, you’ll find that various agencies, courts, and the legislature agree with you.