It was so easy to believe, for signs of success were everywhere. Enron was building a flashy 40-story skyscraper, designed by the architectural superstar Cesar Pelli, at a cost of about $200 million—complete with a $1 million, hand-etched relief map of the world that hung from the atrium ceiling on 18-foot glass panels. Lay told employees that the building “may become kind of the landmark for downtown Houston.” (It was still under construction when Enron collapsed; the building was sold for $102 million in 2002.) In London, Enron’s expensive new offices overlooked Buckingham Palace. “You walked through the offices every day and thought, ‘Someone is paying for this,’ ” says a former Enron Europe employee. “We all had faith based on empirical observations.”
Harvard Business School professors were practically swarming over the premises, working up case studies about the company’s triumphs. (There were at least five touting the Enron model.) Management gurus like Gary Hamel made the pilgrimage as well; a half-dozen management books published beginning in the late 1990s contained admiring discussions about Enron. Fortune named Enron Most Innovative Company six years in a row. CEO magazine picked Enron’s board as one of the top five in corporate America. (Enron’s board “works hard to keep up with things,” the magazine said. “We are heartened by the overall corporate governance structure.”)
Enron also had the blessing of the world’s preeminent consulting firm: McKinsey, which called Enron employees “petropreneurs.” “Enron has built a reputation as one of the world’s most innovative companies by attacking and atomizing traditional industry structure,” wrote McKinsey consultants David Campbell and Ron Hulme, in one of many laudatory pieces McKinsey published on Enron. (Hulme was the lead partner on the Enron account.) Many of Skilling’s theories, from “loose-tight” management to “asset light,” came from McKinsey. Enron continued to be a top McKinsey client, paying some $10 million a year for advice, but more importantly for the firm, Enron’s stunning success became a kind of validation of McKinsey’s brilliance. McKinsey got it, too.
The adulation suited Ken Lay perfectly. He devoted little time to the actual running of the business. Instead, Lay embraced his role as a business visionary, traveling the world—China, India, Russia—and offering his wisdom on everything from energy deregulation to corporate ethics to the future of business. Eminent people, ranging from the Weekly Standard’s editor, William Kristol, to economics star Paul Krugman (now a columnist at the New York Times), came to Houston twice a year to share their thoughts with Lay in a boardroom adjacent to his office on the fiftieth floor. (They were each paid $50,000 a year to do so.) In conjunction with Rice University, Lay even established the Enron Prize for Distinguished Public Service. Recipients included Nelson Mandela, Colin Powell, Mikhail Gorbachev, and, in 2001, Alan Greenspan. That such famous and important people would come to Houston to accept the award was yet another validation of Enron’s success.
A story in the Economist in June of 2000 recounted a speech Lay gave to a gathering of top oil and gas executives in London. As he extolled the virtues of deregulation, people in the room could only nod in agreement; after all, Enron’s market value had increased ninefold over the past decade. “We’ll do it again this coming decade,” Lay said. After the speech, Lay told an aide, “Some of these guys finally seem to get it.” She replied, “Yes, they’re even using some of our language.”
• • •
The perks the company handed out, which were excessive even by the standards of an excessive era, also reinforced the feeling of heady success. There was the elaborate health club in the basement of the headquarters, the free computers provided at home for every Enron employee, the subsidized concierge service.
And there was the pay. How could this be a company in trouble with the salaries it was doling out? Senior people were paid eye-popping sums. Of course, nobody did better than Lay and Skilling. By early 2000, Lay owned 5.4 million shares of Enron stock, worth some $380 million, and Skilling owned 2.3 mil-
lion shares, worth about $160 million. For his work in 1999, Lay got a $1.3 million salary and a cash bonus of $3.9 million, plus another $1.2 million under the performance unit plan, which handed out money based on the performance of Enron’s stock relative to other investments. The board also handed Lay almost a million additional options and shares of restricted stock. Skilling, whose salary was $850,000, got a cash bonus of $3 million.
And it wasn’t just the top-tier executives. According to an analysis by the Joint Committee on Taxation, in 1998, Enron’s 200 most highly compensated employees took home a total of $193 million in salaries, bonuses, and various forms of stock. In 1999, that leaped to $402 million; in 2000, they took home $1.4 billion. For their work in 2000—the last full year before Enron went bankrupt—each of the top 200 employees made over $1 million; 26 executives made over $10 million. In 2001, the year Enron went bankrupt, at least 15 employees made over $10 million.
Most of all, there was an attitude that permeated Enron, an atttitude that Enron people were simply better than everybody else. At conferences, Skilling would openly sneer at competitors. The big oil companies, he would say, were dinosaurs, destined for extinction. At Arthur Andersen’s annual energy symposium in late 2000, he told the audience that companies like the newly formed ExxonMobil “will topple over from their own weight.” In a December 1999 employee meeting an employee asked Skilling if Enron would ever consider merging with a company like Mobil. The Enron president responded: “Well, unfortunately, Mobil has just merged with Exxon, so it won’t be Mobil, which really disappointed me, because if we could have merged with Mobil then we could have been MORON.”
He was no kinder to smaller competitors, companies like Dynegy and El Paso. At an energy conference in Wyoming, Skilling unabashedly boasted that Enron was going to “bury” the competition. “We’re up here—and everybody else is down there,” he declared. Spotting Dynegy CEO Chuck Watson in the audience, he cited the smaller competitor as one of Enron’s certain victims. Watching it all, Watson wondered if Skilling had bothered to contemplate a world without real competitors. Later, he told Skilling, “Jeff, you can’t make money trading with yourself.”
An Enron trader named Jeff Shankman once e-mailed Skilling with a thought that exemplified the Enron attitude. “I wanted also to tell you about this recurring dream I’ve had (three times now),” he wrote. “Your buddy Lee Raymond’s company [ExxonMobil] bought Enron, and you both become co-CEO (money on you), and our mgmt team gets to apply our way of business to ExxonMobil, and unbelievable wealth and shareholder value is created. Odds?”
One outside public-relations consultant tried to ask Enron employees where they thought they were vulnerable. All he got in return were blank stares. People at Enron simply didn’t believe they were vulnerable.
And of course there was the stock. If there was one reason above all others why Enron employees believed, it was that the market was telling them their belief was justified. Many of them were getting rich working for Enron, at least on paper. Early ECT employees owned huge amounts of stock; some owned so much that they were almost (but not quite) indifferent to their salary and bonus.
In employee meetings, Lay and Skilling touted the stock relentlessly. In mid-1999, for instance, when Enron shares were trading at $84 before the split, an employee asked when the stock price would reach $100, an almost 20 percent increase. “I think it’s very possible before year-end. . . . I think there is a fairly good chance we could see the stock price double again over the next year to 18 months,” responded Lay. “Now that’s what’s exciting. You do that math on your Enron stock.”
Five months later, at that December 1, 1999, employee meeting, the very first question was about the stock price, which was selling for about $38 a share after the August stock split. “Why,” an employee asked, “has our stock price decreased over the past several weeks, and what is management doing to get it back up?”
Lay’s message was unchanged: “I don’t want us to ever be satisfied
with a stock price; it should always be higher. . . . Indeed, we still think that over the next several months that there’s a good chance that the stock price could be up as much as 50 percent, and I think there’s no reason to think that over the next two years we can’t double it again . . . particularly depending on how this whole message on our communications business plays out over the next several months.”
Later in that same meeting, Cindy Olson, who ran human resources, took the podium to answer questions. One written on a card was handed up to her. “Should we invest all of our 401(k) in Enron stock?” she read. She looked up at the auditorium full of employees and replied, “Absolutely! Don’t you guys agree?” She smiled at Lay and Skilling.
The whole room laughed appreciatively. “You’re doing good,” Skilling said with a grin.
• • •
On January 19 and 20, 2000, Enron held its annual analysts meeting. For the company, this event had become one of its key rituals of seduction. It was during the 1998 meeting that Skilling and the EES executives had pulled their little Potemkin Village stunt, creating a fake tableau of bustling employees who appeared to be putting together deals for the new retail operation. Over the years, as Enron had reported ever-better earnings and the stock had risen ever upward, the annual get-together with analysts had become, in the words of one participant, “practically like a revival meeting.”
As always, the conference began with cocktails at the Four Seasons Hotel in the evening, followed by a full day of presentations. The previous afternoon, Enron had announced its 1999 results. Enron’s revenues hit $40 billion—up almost nine times from the beginning of the decade. Earnings were up 18 percent. (That is, before nonrecurring charges.) Europe, where Enron had launched a trading business, was “absolutely exploding,” Skilling had reported in the conference call. EES, he’d added, was “just rockin’ and rollin.’ ” There was no hint of the frantic deal doing with Merrill Lynch or the business with LJM that had made those numbers possible. At the cocktail party, there were no hard questions. The mood was one of adulation.
The next day, Skilling and the other executives reviewed the performance of each of the business units, as they did every year. The highlight of the meeting was the unveiling of Enron’s new broadband strategy; the company had set aside two full hours, from 12:30 to 2:30, to give the analysts the complete dog and pony show. The name change, from Enron Communications to Enron Broadband, was just the beginning. Enron announced that the Enron Intelligent Network, which would be the “industry standard,” would help Enron become both “the world’s largest buyer and seller of bandwidth” and “the world’s largest provider of premium broadband delivery services.”
“Today’s message,” read a slide in the presentation, is that “the broadband explosion is real, it is here now. . . . The Enron business model, which emphasizes open, robust networks and markets, will enable Enron to develop the most efficient broadband delivery network in the world.” In fact, “Enron Broadband has already established the superior broadband delivery network.”
When the executives talked about the Enron Intelligent Network, they made it sound as if it were working already. “This software layer, is this a pipedream, is this something that we’re going to get done in the next five years?” asked Joe Hirko, co-CEO of the business. “No, this is something that exists today.” He also said that Enron could “deliver an Internet experience that has quality of service that’s appropriate for the content being transmitted. It basically allows us to achieve the vision of the Internet that was never possible because of the way it was originally architected.”
For his part, Rice talked about the way the EIN could identify applica-
tions that required a higher quality of service and how Enron, thanks to its proprietary software, could switch customers between its broadband network and other networks.
To bolster the company’s claims, Enron trotted out a surprise guest, Scott McNealy, the CEO of Sun Microsystems, who announced that Enron would buy 18,000 Sun routers to help build its network. “Instant credibility,” Goldman’s David Fleischer later noted. Ken Lay took to the podium to predict that bandwidth trading would dwarf Enron’s gas- and power-trading businesses. And Skilling told the crowd of analysts just how they should value the nascent business. The U.S. market for bandwidth “intermediation,” he said, would hit $68 billion in 2004. Enron would quickly control 20 percent of this market plus some of the international market. This business, Skilling predicted, would generate operating income of over $1 billion by 2004. The content-services side would generate global revenues of $11.7 billion by 2008, producing another $3.5 billion in operating income. By his calculation, the two parts of the business were together worth $29 billion, or $37 a share that was not accounted for in Enron’s stock price. Skilling, of course, did not mean that the business would be worth $29 billion in six or seven years. He meant that it was worth that much today.
The room practically exploded at the announcement. Some 200 securities analysts and institutional investors rushed out to the hallway to call their trading desks. By the close of the market, Enron’s stock had risen 26 percent—in a single day—to a new high of $67.25.
The late afternoon tour of broadband services on the forty-fourth floor of the Enron building, which had been outfitted with flat-screen TVs and servers in glass boxes, capped the hysteria perfectly. That night, an Enron executive standing in line at the airport found himself behind two analysts; as he eavesdropped, they raved about how Enron was the last undiscovered technology play. “It got everyone excited about how we could play the Street,” says a former Enron executive. “When they wheeled out McNealy, we all sat and watched the stock fly.”
Over the next few days, as the analysts issued their reports on Enron’s meeting, the drumbeat only intensified. Analyst Carol Coale at Prudential Securities cited the “impressive story” that Enron had told and raised her target price on Enron shares from $52 to $85. Ray Niles of Schroder & Company—who later moved to Citigroup’s Salomon Smith Barney—raised his price target to $100. “We see validation in the sheer technical excellence that was obvious from our walk-through of Enron’s facilities,” he wrote. Credit Suisse First Boston analyst Steven Parla: “For Enron to say we can do bandwidth trading is like Babe Ruth’s saying, I can hit that pitcher. . . . The risk is staggeringly low, and the potential reward is staggeringly high.” Brownlee Thomas, an analyst at Giga Information Group: “Absolutely it will succeed.” Deutsche Bank: “All we can say is WOW.” Merrill’s Donato Eassey: “Although this is still an energy company, in our view, Enron fits the description of a ‘New Economy’ stock. . . .” Having Enron viewed as a new economy stock, of course, was precisely Skilling’s goal; new economy stocks got valuations that energy companies could only dream of.
One analyst, Hugh Holman of Robertson Stephens, even apologized for failing to “do justice” to the business in his note, writing that “we suspect that most attendees at today’s conference, like ourselves, are being asked to venture fairly far afield from their home turf (natural gas, power, energy) . . . it’s not that we don’t get it, or are unexcited by the prospects laid out for us; rather it’s that we have no highly tuned critical filter to apply. . . .”
With each passing month, the hype seemed only to intensify. On an April 2000 conference call, Skilling told analysts about EOL. “It is astounding. . . .” Skilling said. “I feel a little bit like we have been swamped with new opportunities, and we are just trying to sort them out and figure out what we do with all of them.” In July, he commented, “I’ve said this, but I’m afraid it just continues to be true . . . I’ve never seen the company in better shape. Our core markets are just absolutely moving from strength to strength.” And in the fall of 2000, Skilling said about the wholesale business, “If we can maintain or build a 25 percent market share worldwide, this business by itself could have revenues of over a quarter trillion dollars a year!”
On August 23, 2000, Enron’s stock cl
osed at $90—its all-time high—giving Enron a market valuation approaching $70 billion. As the stock ran up, analysts raced to raise their price targets; Launer put his at $115 a share. As McKinsey’s Hulme and Campbell wrote a few months later, “Enron has convinced Wall Street of the favorable long term prospects of its new businesses; about half its current market cap is attributable to businesses that have yet to generate annual earnings. As a result of this persuasiveness, Enron trades at a PE multiple of 60”—four times the industry average. When people asked Jeff Skilling about the chances of the stock tumbling, he had a ready answer: “I can’t worry about comets hitting the building.”
There was, however, at least one person who didn’t believe it was going to last. Not long after leaving the company, Forrest Hoglund, the former head of Enron Oil and Gas, began warning friends who owned Enron shares. “Nobody knows how they get their numbers, but as long as they make them, the market’s going to accept it,” Hoglund said. “But if they ever stumble, the stock’ll fall twice as far as your worst bad dream.”
CHAPTER 16
When Pigs Could Fly
As Enron’s stock was rising to new heights and the acclaim for Skilling and Lay was reaching new crescendos, where was the company’s former superstar, Rebecca Mark? Although Skilling had managed to push her out as the head of Enron International, she had convinced Enron’s board of directors to set her up in the water business, in a new Enron subsidiary named Azurix, which she’d run herself as chair and CEO. The operation was launched in July 1998, with Enron’s $2.4 billion all-cash purchase of a British water utility called Wessex.
Mark spent the next two years doing what she’d always done: racing around the globe like a madwoman, working harder than seemed humanly possible to put deals together. She wanted to run something on her own, apart from Enron, and prove to the world that she could succeed. But it was not to be. Azurix was handicapped from the start, and everything Mark did over the next two years only made matters worse. On August 25, 2000, just two days after Enron’s stock hit its high, Mark was forced to resign as CEO of Azurix and leave Enron as well.
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