Proposed buyout by Dynegy
Sources claimed that Enron was planning to explain its business practices more fully within the coming days, as a confidence-building gesture.[70] Enron's stock was now trading at around $7, and by this time it was obvious that Enron could not stay independent. However, investors worried that the company would not be able to find a buyer.
After Enron had received a wide spectrum of rejections, Enron management apparently found a buyer when the board of Dynegy, another energy trader based in Houston, voted late at night on November 7 to acquire Enron at a very low price of about $8 billion in stock.[71] Chevron Texaco, which at the time owned about a quarter of Dynegy, agreed to provide Enron with $2.5 billion in cash, specifically $1 billion at first and the rest when the deal was completed. Dynegy would also be required to assume nearly $13 billion of debt, plus any other debt hitherto occluded by the Enron management's secretive business practices,[71] possibly as much as $10 billion in "hidden" debt.[72] Dynegy and Enron confirmed their deal on November 8, 2001.
With Enron in a state of near collapse, the deal was largely on Dynegy's terms. Dynegy would be the surviving company, and Dynegy CEO Charles Watson and his management team would head the merged company. Enron shareholders would get a 40 percent stake in the enlarged Dynegy, and Enron would get three seats on the merged company's board. Lay would not have any management role, though it was presumed he would get one of Enron's seats on the board. Of Enron's senior executives, only Whalley would join the merged company's C-suite, as an executive vice president. Dynegy agreed to invest $1.5 billion into Enron to keep it alive until the deal closed.[62][10]
As a measure of how dire Enron's financial picture had become, the company initially balked at paying its bills for November until the credit agencies gave the merger their blessing and allowed Enron to keep its credit at investment grade. By this time, the Dynegy deal was virtually the only thing keeping the company alive, and Enron officials wanted to keep as much cash in the company's coffers in the event of bankruptcy.[62] Had the credit agencies balked at the deal and reduced Enron to junk status, its ability to trade would be severely limited if there was a reduction or elimination of its credit lines with competitors.[62] Ultimately, after Enron and Dynegy retooled the deal to make it harder for Dynegy to trigger the "material adverse change" clause and pull out, Moody's and S&P agreed to drop Enron to one notch above junk status, allowing Enron to pay its bills one day late with interest.[62]
Commentators remarked on the different corporate cultures between Dynegy and Enron, and on Watson's "straight-talking" personality.[8] Some wondered if Enron's troubles had not simply been the result of innocent accounting errors.[73] By November, Enron was asserting that the billion-plus "one-time charges" disclosed in October should in reality have been $200 million, with the rest of the amount simply corrections of dormant accounting mistakes.[74] Many feared other "mistakes" and restatements might yet be revealed.[75]
Another major correction of Enron's earnings was announced on November 9, with a reduction of $591 million of the stated revenue of years 1997–2000. The charges were said to come largely from two special purpose partnerships (JEDI and Chewco). The corrections resulted in the virtual elimination of profit for fiscal year 1997, with significant reductions for the other years. Despite this disclosure, Dynegy declared it still intended to purchase Enron.[74] Both companies were said to be anxious to receive an official assessment of the proposed sale from Moody's and S&P presumably to understand the effect the completion of any buyout transaction would have on Dynegy and Enron's credit rating. In addition, concerns were raised regarding antitrust regulatory restrictions resulting in possible divestiture, along with what to some observers were the radically different corporate cultures of Enron and Dynegy.[72]
Both companies promoted the deal aggressively, and some observers were hopeful; Watson was praised for attempting to create the largest company on the energy market.[75] At the time, Watson said: "We feel [Enron] is a very solid company with plenty of capacity to withstand whatever happens the next few months."[75] One analyst called the deal "a whopper ... a very good deal financially, certainly should be a good deal strategically, and provides some immediate balance-sheet backstop for Enron."[76]
Credit issues were becoming more critical, however. Around the time the buyout was made public, Moody's and S&P publicly announced that they had reduced Enron to just above junk status.[75] In a conference call, S&P affirmed that, were Enron not to be bought, S&P would reduce its rating to low BB or high B, ratings noted as being within junk status.[77] Additionally, many traders had limited their involvement with Enron, or stopped doing business altogether, fearing more bad news. Watson again attempted to re-assure, attesting at a presentation to investors that there was "nothing wrong with Enron's business".[76] He also acknowledged that remunerative steps (in the form of more stock options) would have to be taken to redress the animosity of many Enron employees towards management after it was revealed that Lay and other officials had sold hundreds of millions of dollars' worth of stock during the months prior to the crisis.[76] The situation was not helped by the disclosure that Lay, his "reputation in tatters",[78] stood to receive a payment of $60 million as a change-of-control fee subsequent to the Dynegy acquisition, while many Enron employees had seen their retirement accounts, which were based largely on Enron stock, ravaged as the price decreased 90% in a year. An official at a company owned by Enron stated "We had some married couples who both worked who lost as much as $800,000 or $900,000. It pretty much wiped out every employee's savings plan."
Watson assured investors that the true nature of Enron's business had been made apparent to him: "We have comfort there is not another shoe to drop. If there is no shoe, this is a phenomenally good transaction."[77] Watson further asserted that Enron's energy trading part alone was worth the price Dynegy was paying for the whole company.[80]
By mid-November, Enron announced it was planning to sell about $8 billion worth of underperforming assets, along with a general plan to reduce its scale for the sake of financial stability.[81] On November 19 Enron disclosed to the public further evidence of its critical state of affairs, most pressingly that the company had debt repayment obligations in the range of $9 billion by the end of 2002. Such debts were "vastly in excess" of its available cash.[82] Also, the success of measures to preserve its solvency were not guaranteed, specifically as regarded asset sales and debt refinancing. In a statement, Enron revealed "An adverse outcome with respect to any of these matters would likely have a material adverse impact on Enron's ability to continue as a going concern."[82]
Two days later, on November 21, Wall Street expressed serious doubts that Dynegy would proceed with its deal at all, or would seek to radically renegotiate. Furthermore, Enron revealed in a 10-Q filing that almost all the money it had recently borrowed for purposes including buying its commercial paper, or about $5 billion, had been exhausted in just 50 days. Analysts were unnerved at the revelation, especially since Dynegy was reported to have also been unaware of Enron's rate of cash use.[83] In order to end the proposed buyout, Dynegy would need to legally demonstrate a "material change" in the circumstances of the transaction; as late as November 22, sources close to Dynegy were skeptical that the latest revelations constituted sufficient grounds.[84] Indeed, while Lay assumed that one of his underlings had shared the 10-Q with Dynegy officials, no one at Dynegy saw it until it was released to the public. It subsequently emerged that Enron's traders had grabbed much of the money from Dynegy's cash infusion and used it to guarantee payment to their trading partners when it came time to settle up.[62]
The SEC announced it had filed civil fraud complaints against Andersen.[85] A few days later, sources claimed Enron and Dynegy were renegotiating the terms of their arrangement.[86] Dynegy now demanded Enron agree to be bought for $4 billion rather than the previous $8 billion. Observers were reporting difficulties in ascertaining which of Enron's operations, if any, were profitable. Reports described an en masse shift of business to Enron's competitors for the sake of risk exposure reduction.[86]
