Enron was founded in 1986 by Kenneth Lay resulted from a merger between Houston Natural Gas Co. and Omaha-based InterNorth Inc.. As a result from the merger, Lay, who previously held the position of the chief executive officer (CEO) of Houston Natural Gas, has been appointed to hold position as Enron’s CEO and chairman. Lay intended to take advantage on the opportunity that he foresees from the natural gas industry’s deregulation in the USA. Enron started its business and operation as a pipelines company, but then, Jeff Skilling had an idea and he suggested Enron to apply models that have been used in the financial services industry to the deregulated gas industry.
Enron was convinced by Skilling to set up a Gas Bank whereby Enron will act as intermediary between buyers and sellers of natural gas when they transact with each other. Enron as the intermediary would contribute both parties with pricing and delivery that were reliable and predictable. Skilling duly hired by Enron to operate the company and he has contributed to the set up of a major gas trading operation through the early nineties. As a result, Enron started to upgrade its pipeline operations which were initially in the USA into a wider power supply business on an international scale by completing a large plant at Teesside in the UK and engaging in a contract to build a big plant which expected to be built near Mumbai in India. Later, Enron continued in dealing with the worldwide, from South America to China. The aggressive growth of Enron’s power business worldwide has become one of the crucial factors that contribute to the Enron’s global reputation.
Skilling has a strong vision which is he intended to transform Enron into a bigger, asset-light operation, trading power. Then, Skilling was targeting to transform Enron into trading electricity. Apart from that, Lay influenced and persuaded Washington to deregulate electricity supply. Later, Lay and Skilling brought Enron into California and bought a power plant on the west coast. The global reputation of Enron relied on the Enron’s steadily growing revenue and earnings from trading as well as rapid growth of Enron’s domestic business. As a result from Skilling’s previous significant contributions, Skilling been appointed by Lay to hold the position of Chief Operating Officer and later, he began transforming the whole of Enron to achieve his vision. By observing the bursting of the dot-com bubble, Skilling decided to create Enron a new business based on a high-speed broadband network which could supply and trade bandwidth.
However, the effort put in the deregulation in California did not work well and become worthless and later was inverted with recriminations globally. Apart from that, the international business growth was not supported by adequate administration and later on most of the contracts turned bad. Thus, Enron decided to try to become a significant global leader in the water industry by acquiring a big water company in the UK followed by a big deal in Argentina in order to establish on its international and global presence. At that time, around 2000, Enron’s position was still increasing high. Lay and Skilling were known as inspired thinkers and top business leaders.
However, the rapid growth had performed out of Enron’s ability to fund it, and to solve the crisis, Enron had secretly formed a complex web of off-balance sheet financing vehicles and have caused Enron’s share price rapidly increased. By the end of 2000, Enron started to collapse. Skilling had an idea on how to hide the financial losses incurred from the trading business and other operations of the company. Skilling suggested Enron to use mark-to-market accounting technique. This technique measured the value of a security based on its current market value, instead of its book value and has been used in trading securities. This might be effective for the securities, however for other businesses it can be disastrous. In particular, by using mark to market valuation Enron able to generate artificially large earnings to cover and disguise the underlying poor profitability of the business.
Generally, Enron did not earn enough cashflow, while spending huge amount on growing and expanding the business, and eventually it crashed suddenly and dramatically. There were some doubts arose in the market regarding the Enron’s cash position and its profitability. By late summer of 2001, doubt and suspicions kept growing regarding Enron’s manipulated earnings.