How a Group of Students Sold Enron a year Before the Collapse
The article talks about how some students from Cornell University analyze Enron's stock using both technical and fundamental analysis. At the time, 1998, Enron was a high performing company, however, after taking on a project on financial analysis as part of their course work the students met inconsistencies in the annual report. These discrepancies suggested that something was amiss, and fraud was the likely reason. Cornell University has a live investment fund known as Cayuga fund with $650,000. The funds purchased Enron shares in December 1998 at $27 per share and more in October 1999. This totaled 720 shares for an average of $29.40. The company seemed to provide the fund the opportunity to make huge returns. However, some students-Tyger Park and Fiedhli Boyle had made a sell recommendation on Enron's shares. They made a presentation, and their proposal was taken up which saw the immediate dumping of Enron shares by the fund. The shares were sold at $67.38 which translated into a 129% profit. That was on December 1, 2000, December 2, 2001, Enron filed for bankruptcy (Morris).
According to the analysis of the students, Enron’s growth rate was inconsistent with its income and the growth was completely unsustainable and would not last long. The article also talks about how numerous business schools have set up their own funds with live investment accounts and also mentions how more and more business schools are taking an interest in analytics similar to that of Cornell University. The students had found it hard to understand the footnotes found in Enron's annual reports. As a result, they had to take a closer look at the histories and raw data. The poor financial management of the firm saw the firm amass huge debts that were not sustainable to the extent the company had negative cash flows.
Why Enron Went Bust Start With Arrogance. Add Greed, Deceit, And Financial Chicanery. What Do You Get? A Company That Wasn't What It Was Cracked Up To Be
The article talks about how prior to Enron's collapse the company's management was quite defensive in its responses to the questions raised concerning the complexity of their financial statements and why they were difficult to understand. The CEO at the time, Jeff Skilling, was at the one leading the defensive pack. He had consistently indicated that those who did not understand its financial statements did not 'get it'. The company was able to gunner the confidence of the Wall Street analysts who were precisely attracted by the steady growth posted by the corporation.
The company was marred with a culture of arrogance, trading secrets and lack of profits. The company’s culture was primarily focused on how much money they can make without setting up an appropriate means to do so. The culture pitted the employees against each other. Competition was rife within the organization. Enron also traded in secret, taking on more risk than the average company and especially in long term contracts that were far less liquid. Enron’s cash flows also seemed to bear little or no relationship to it earnings. Its balance sheet debt skyrocketed from $3.5 billion to $13 billion. A careful analysis of the firm’s financials would have indicated the lack of profitability (McLean).
The first sign that things were headed downhill at the company was Skilling's decision to leave. As soon as Ken Lay took over he was quick to indicate that the organization was in a strong financial position, and the huge amount of debt was non-recourse. This meant that the shareholders would be paid rather than the lenders in case the company went down. In the end, it can be noted that a lot of things went wrong from poor management, lack of a clear business definition to poor culture among numerous unethical practices within the company.
Works Cited
McLean, Bethany. Why Enron Went Bust Start With Arrogance. Add Greed, Deceit, And Financial Chicanery. What Do You Get? A Company That Wasn't What It Was Cracked Up To Be. 24 Dec. 2001. Web. 9 Feb. 2016.
Morris, Gregory. How a Group of Students Sold Enron a year Before the Collapse. 2009. Web. 9 Feb. 2016.
