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Enron in trouble; Microsoft sees reprieve

C. Gopinath

ENRON is facing corruption charges, and this time it has nothing to do with Maharashtra! The shock waves began when the company announced in early October that it had a $618 million (Rs 2,966 crore) loss in the third quarter and also disclosed write-offs to the tune of $1.2 billion (Rs 5,760 crore) due to some questionable transactions.

Two of these deals were made public in the last couple of weeks. In one, Mr Andrew Fastow, the company's Chief Financial Officer, ran a private partnership called LJM2 Co-Investment LP. (named with the initials of his wife and children) with whom Enron h ad several financial transactions. The aim of the transactions was to hedge against fluctuating values in some of Enron's investments.

Mr Fastow and other Enron employees who were a part of this partnership made millions in fees and investment gains in their personal accounts. Mr. Fastow was fired after the revelations. Second, the company is said to have made a $35-million (Rs 168-cror e) purchase from an entity called Chewco Investments LP, run by Michael Kopper, managing director of its North America unit. This deal is seen as an attempt by Enron to park some of its debt elsewhere.

Enron, which began as a natural gas and energy products company, has made important forays into retail energy and bandwidth products. And its growth has been phenomenal. From $13 billion (Rs 62,400 crore) in revenues in 1996, the company, in 2000, had re venues of $100 billion (Rs 80,000 crore). In 1999-2000 alone, it grew 150 per cent.

As an energy trader, the company is a dominant force in the markets. It extended its trading skills and software infrastructure into the bandwidth area, where it has met with more limited success. However, another venture, named Azurix, focussed on manag ing water supply and headed by Rebecca Mark (of Dabhol fame) was a failure, leading to her exit from the company.

Some analysts are now beginning to wonder if the phenomenal results of the company have something to do with its creative accounting. By setting up these private partnerships and making deals with them, Enron is said to have borrowed large sums of money for asset purchases without the debt showing up on the company's balance sheet.

Analysts who often write about Enron use terms like 'Byzantine' and 'labyrinth' in describing its financial dealings. Now, they are admitting that they did not really understand what was going on. Enron has been very secretive when it comes to revealing its financial arrangements. Clearly, the company seems to have se -up all these private partnerships to make its balance sheet look clean and nice. In return, it allowed its senior employees to profit and fatten their wallets through the fees paid for th e transactions. Was it the price paid to keep quiet?

S&P and Moody's have lowered the company's credit rating. Its stock price has fallen from a high of about $85 (Rs 4,080) a year ago to about $13 (Rs 624) now. And newspapers are speculating that the company may be bought over. The Securities and Exchange Commission of the US has begun investigating the company. But Enron and its Chairman, Mr Kenneth Lay, are major contributors to President Bush and his Republican Party. So don't hold your breath.

The immediate question that arises is that Enron's Board must have been aware of these conflicts of interest, where employees were benefiting in private deals they were making with, and on behalf of, the company. This is especially glaring in the case of Mr Fastow, who made the decision on both sides of the fence _ thatis, as CFO of Enron and as the managing partner of the partnership he was running. Why was the board sitting quiet about the corruption at this level?

A look at the board's composition provides some interesting information. Apart from several luminaries in the energy and petroleum fields, three individuals should draw attention. One is Mr Norman Blake, a former Secretary General of the US Olympic Commi ttee, an agency that was not so long ago caught in a scandal involving pay-offs to secure hosting rights for the games.

Another is a Professor Robert Jaedicke, a professor of Accounting at Stanford University. A third is Ms Wendy Gramm, a former Chairperson of the US Commodity Futures Trading Commission. If nobody else, these people should be experienced in recognising ma naged accounting figures, and in smelling suspicious deals. Clearly, a lot of people at Enron were looking the other way, intentionally or accidentally.

The company claims, in its website, that ``It is difficult to talk about Enron without using the word 'innovative'''. How true!

And Microsoft scores

While Enron is getting into trouble, Microsoft is trying to climb out of it. In 1998, the US federal government, along with about 20 state governments, filed a suit against Microsoft charging it with monopolistic practices. The trial court held against t he company and a new judge who was appointed has been pushing the parties to settle. A tentative settlement was announced on November 2 and it seems, at first glance, that all the effort will not make the company behave any different.

Among others, the settlement requires Microsoft to disclose technical data to help competitors make programs; PC manufacturers will have more freedom to ship machines with non-Microsoft products and the company cannot retaliate against them; and it will have to establish standard royalties and licensing terms. More interestingly, a three-member panel will be located at Microsoft headquarters with staff and access to company records to monitor compliance with the settlement. The period is initially for f ive years, and is extendable to two more.

While Microsoft may not secure high marks for the quality of its products, the company has always been a leader with its strategy. Though technology-savvy users of personal computers have always praised Apple for its hardware and its operating system, Mi crosoft is the one that has climbed to dominate with 90 per cent market share. And this is because it quickly worked with allies to establish its operating system as the more widely used standard.

With comparable astuteness, the company managed to drag the anti-trust case long enough till a more sympathetic President occupied the White House. The anti-trust head under the the Democratic President Clinton was Joel Klein, who was seen as a hawk, dog gedly pursuing the company. So Microsoft waited it out, while making significant monetary contributions to the Republican Party. Even on the campaign trail, Mr George Bush made it known that he was not such a fervent devotee of anti-trust. Once he came t o power, the newly appointed anti-trust chief quickly moved to compromise and settle.

The proposed settlement is not leaving everyone happy. The other private corporations that were affected by Microsoft's practices are clearly disappointed with the terms of the settlement. America Online, now incarnated as AOL Time Warner, is the biggest Internet service provider, with about 30 million subscribers, and benefited from partnership with Microsoft. But the new Windows XP only has the company's own MSN service and its own messaging system, cutting out AOL.

Sun Microsystems is another affected party. Sun's Java software allowed the same piece of computer code to run on many different kinds of computers. But the new Windows XP has dropped support for Java. Thus, both Sun and AOL, among others, feel closed ou t and do not see any change in Microsoft's monopolistic behavior.

It is this fact that has also upset about six of the state governments, which are also parties to the suit. At the time of writing, they have refused to sign on. Massachusetts, for one, has protested that it is an ineffectual deal.

Microsoft bravely moves on, surviving a possible threat of break-up, like a juggernaut crushing all that come in its path. But a recent `Wall Street' Journal report has it that the controversy has taken its toll within, that employee morale is down, and several key people have left the company. Even if it manages to close the chapter on its US legal troubles, the company still faces an investigation by the European Commission.

Correction: In my column last fortnight, I incorrectly mentioned that Polaroid's headquarters building was empty and for sale. Polaroid does not own the building any more and only rents space in it.