Enron Case Study Analysis In Education

Case-Study-So-What-is-It-WorthPrior Post where students discussed the case.

Turn up the VOLUME: Don’t believe the …..?

Enron-Case-Study-So-What-is-It-Worth  My walk-through. I go straight to the balance sheet then calculate the returns on total capital in the business. These financial statements were easy to discard because of the size of the business and the poor returns. My estimate of $5 to $7 per share worth or 90% less than the current share price, was wrong. The company was worth $0.  This is more a case of institutional imperative and incentive-based bias. Wall Street was feeding at the financial trough to keep raising money for Enron (to keep the bad businesses afloat) so guess what the financial analysts (CFAs and MBAs) suggested? Buy!   I guess the market is not ALWAYS efficient.

Forget accounting scandals, this was a crappy business based on trading so no way to determine normalized earnings.   When I was in Brazil and saw Enron’s newly-built generating plant sitting idle, I asked why.   A project developer said he got paid by doing deals by their size not profitability, therefore, the bigger the white elephant, the better.  When I called mutual funds who owned Enron as it was trading $77 per share to ask the analyst if he/she was aware of Enron’s declining businesses coupled with absurd price, I was told to shut up. As one analyst (Morgan Stanley?) told me, “I only believe what I want to believe and disregard the rest.”

Enron Annual Report 2000  Ha, ha! and Is Enron Overpriced?

The above august panel never answered why anyone would give capital to Enron?  No one mentions the elephant in the room.  Sad.

What does the above case have to do with net/nets and our course. Everything! Look at the numbers, think for thyself, ignore Wall Street, and be aware of incentives.   Buying bad businesses at premium prices is a guarantee of financial death.

This is an aside, but based on the above Enron example, does value investing serve a SOCIAL purpose or benefit? Prof. Greenblatt doesn’t think so–you are just trading pieces of paper, but what do YOU think?

See these two venture capitalists explain the social purpose of their business:

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Enron’s collapse 2 Enron: What Caused the Ethical Collapse? Enron, a Texas based energy company, has improved the way that electricity and natural gas is purchased ever since its inception in 1985 when its owner, Kenneth Lay, merged his original company called InterNorth with Houston Natural Gas Company. In addition to this, Enron’s growth was attributed to not only the U.S. congress deregulating the sale of natural gas but its selling of electricity at market prices. Even though Enron’s started with natural gas especially shipping natural gas on its pipelines, this company desired larger profits and shifted into electricity trading operations and/or was one of the first energy companies or traders to get into the electricity trading, which started some of its troubles. In light of the fact that electrical traders in Enron involved themselves in schemes to defraud officials running California's power grid, these same electrical traders at Enron drove up prices during the California power crisis through controversial techniques that contributed' to severe power shortages (Isaacs, 2012, Oppel & Gerth, 2002, Brigham & Daves, 2013, Enron-The rise and fall of the Energy Giant, 2011). In fact, Enron, which was once a favorite to investors and an American energy company had filed the hugest corporate bankruptcy because of the major events that led to the eventual collapse of this corporation, the ways the top leadership at this company undermined the foundation values of its own Code of Ethics, and the unethical decisions and actions that were promoted by its corporate culture. Firstly, there were many causes that led to the eventual collapse of Enron especially under Kenneth Lay, Jeffrey Skilling, Andrew S. Fastow, and other top-level officers. For instance, not only the fraudulent or deceitful activities that were orchestrated by Lay, Skilling, and Fastow, but also the company’s criminal and dishonest corporate culture caused the eventual collapse of Enron. In fact, the violation of laws that were not enforced or applied by the chair,

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