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What was Enron’s stock price history, and why is it important?
Enron’s stock price history is an important part of understanding the fall of Enron. Enron’s share price history shows the incredible growth and collapse of the company. Additionally, the stock price history can help show how Enron’s value continued to rise even as the company lost money, due to their fraudulent practices.
Enron Stock Price History: Ups and Downs
Despite all this trouble bubbling under the surface, in the heady period of 1999-2000, Enron stock exploded in price, reaching ~90 in Aug 1999 before being split 2:1, then doubling to reach 90 again in Aug 2000 for a market cap of $70 billion. It outperformed the S&P by over 200%. Enron’s stock price history shows the company’s unlikely performance.
This is a testament to how powerfully its accounting distortions disguised the true nature of the problems brewing.
- 2000 revenues showed $100 billion, 100% over 1999. Earnings hit $1.3 billion, up 25% per share.
Enron was paraded as a visionary company, building new businesses like Enron Online in the Internet era.
To the public, Enron only ever expressed certainty of being a juggernaut. Said Enron, it would inevitably own 20% of every major market, which meant its fledgling businesses were already worth billions, and should be priced accordingly. After such an announcement in their analyst meeting in Jan 2000, Enron’s stock rose 26% in a single day.
Enron employees started drinking the kool-aid. They thought they couldn’t make mistakes and were bulletproof.
(Shortform note: also consider yourself in this situation: Enron’s stock price has quadrupled in the past 2 years. How easy would it be to overlook bad behavior in these heady times?)
There started to be mounting external and internal concern about the reality of the losses. Enron’s stock price history hinted at trouble.
By spring 2000, the dotcom bull market was over. Analysts were now questioning business plans and looking for fundamental cashflow and revenue. Momentum investors were selling instead of buying.
- Stories ran about how energy companies used mark-to-market accounting, and no outsider knew the assumptions they used to book earnings.
- Short sellers were gaining credibility and wielding larger sticks. Investor Chanos was skeptical Enron’s broadband business could be doing so well when the rest of the industry was getting slaughtered.
More negative signs cast doubt on Enron:
- Unclear disclosures about dealings with a related party
- Lay and Skilling were selling shares
- Debt was climbing when Enron was supposed to be profitable
- No one could explain how Enron made money
- Redeployments/layoffs were happening at the broadband business.
- In April 2001, on an earnings call, Skilling famously called a skeptical short-seller an “asshole” for saying Enron was the only firm who couldn’t release a balance sheet or cashflow statement. Said a stunned analyst, “any CEO should be able to handle the hardest of questions from the most aggressive of shorts.”
In February 2001, an Enron accountant, Wanda Curry, saw that EES (the retail division) had over-optimistic valuations of deals and bad trades that, on inspection, actually put the division in the red by $500MM.
- Enron’s solution was to merge the trading losses with the wholesale traders’ profits, eking out a mild profit in total. However, Enron didn’t properly report the combination of the two.
In March 2001, this book’s author (Bethany McLean) published a landmark article, “Is Enron Overpriced”, which showed the public that professional analysts had no idea how Enron made money. Enron stock history didn’t reflect this—yet.
In May 2001, a researcher wrote a paper deconstructing Enron’s cash flow. Of Enron’s reported $4.8 billion in operating cash flow, $2 billion was from customer deposits (which would be paid back if energy prices fell); $1 billion was from a onetime sale of inventory, and another $1.5 billion was the result of prepay. This showed a dramatically different story than the idea that Enron’s cash flow was stable and recurring.
In July 2001, internal concern over LJM’s dealings with Enron prompted Fastow to sell his interest in the LJM funds to Michael Kopper, who left Enron.
Even employees started questioning Skilling publicly: “You say we’re going to make half a billion a year. What’s your strategy?” Skilling replied: “that’s what you guys are for.” Enron’s share price history would eventually reflect these issues.
The Dominoes Start to Fall
As a result, Enron’s stock price history shows that the price fell dramatically: from a height of $82 after their investor conference in Jan 2001, down to $68.50 in Feb 28 and $55 in March 21.
- Even in July 2001, when Skilling announced Enron had beaten earnings per share, share prices didn’t budge. The market had become too skeptical.
In August 2001, Skilling resigned as CEO.
- Reasons: The pressures of maintaining a rosy public facade while dealing with internal turmoil ate at him. For someone obsessed with the stock price, its decline represented a personal failure. He hated getting his hands dirty, and his job was now about fixing problems.
- Skilling’s resignation fueled suspicion that something was wrong inside Enron.
Ken Lay returned to a hero’s welcome, like the company’s savior. But having been a non-operator for years, he wasn’t helpful.
- He announced a onetime options grant of 5% of salary. The stock was at the bottom of the cycle, and “we want you to enjoy the ride back up.” The stock was at $38.
- He announced Greg Whalley, head of wholesale trading, as COO. Whalley quickly dug in and pressed for clear financials.
- Tidbit: Ken Lay himself was paying off creditors. Despite having a net worth at its peak in the 9 digits, he had “diversified” by taking out loans with Enron stock as collateral, and with terms to face margin calls at lower Enron stock prices. The loans were then put into ill-fated investments.
Here was the nightmare dominoes scenario – where all the intricately connected layers would fail because of their dependencies:
- If Enron missed earnings, its stock price would fall.
- If its stock fell, its SPE deals would unwind (since they were predicated on Enron stock prices rising), causing Enron to have to book massive debt on its balance sheet or issue new shares. This would cause further stock price falls.
- This increased debt would cause a downgrade of Enron’s creditworthiness.
- This would trigger provisions in Enron’s debt agreements to pay back loans early, and trading partners to demand cash collateral.
- Since Enron didn’t actually have cash, its ability to pay would progressively worsen, causing it to go bankrupt.
- Senior managers predicted the likelihood of this at less than 25%.
The SPE Raptor deals ran into trouble.
- The Raptor deals became underwater by 9 figures, especially in the market hit after September 11.
- Andersen auditors realized they made an accounting error – Raptor restructuring had been booked as a boost in shareholder equity and needed to be reversed, costing equity $1.2 billion.
- This would be recorded as a simple equity reduction, rather than a restatement, which would admit mistakes and trigger SEC inquiries and lawsuits.
- COO Whalley argued to take the hit and clean up. They felt Enron would recover after cleaning up.
- To make the accounting look more favorable, Enron wanted the correction as a nonrecurring charge. Since this was originally booked as operating profit, this was grossly inappropriate. Andersen put up a fight, but ultimately Enron forced their hand.
On Oct 16 2001, Enron shared its third quarter report. They were sanguine as usual: “recurring Q3 earnings of $.03 per diluted share; reports nonrecurring charges of $1.01 billion…reaffirms recurring estimates.” Enron’s stock price history shows these changes.
- The Wall Street Journal attacked the nature of the writedowns in a series of articles.
- Prompted by these articles, the SEC began an informal inquiry into Enron’s dealings with Fastow’s partnerships. Announcement of this sank the stock 20% to $20.65
- Oct 17: Moody’s announced it was placing Enron’s debt on review for a possible downgrade. It focused on 3 issues: negative operating cashflow, slow progress in asset sales, and more writeoffs involving Dabhol, Azurix, and broadband.
- Oct 23: Andy Fastow was interviewed about his income from the LJM deals. The next day, Whalley fired him.
On Oct 24, 2001, Enron was unable to roll its “commercial paper,” short-term loans used for day-to-day expenses. It had no operating cash.
- It desperately tried to make deals for cash – like opening up its books – but no one was willing to bite. It had to draw down $3 billion in backup credit lines.
- The last-ditch solution was to sell their pipelines, the only steady cash generator Enron had left.
- Enron’s trading also required credit to survive – trading partners would start demanding cash collateral.
Through this turmoil, Arthur Andersen began realizing how bad their work with Enron would make them look.
- Andersen had previously paid fines for accounting fraud at Waste Management – it had a cease-and-desist from the SEC from misconduct. In that case, Andersen’s records had provided regulators with plenty of proof – it wanted to avoid that mistake again.
- There was a shredding frenzy in both Enron and Arthur Andersen (following normal “document retention procedures”) until an official subpoena on Oct 26 forced them to stop.
- Andersen also saw major mistakes in Enron’s SPEs accounting, with the 3% not being truly independent capital. This meant the deals had to go back on Enron’s books.
Once dancing to Enron’s tune, the bankers realized their new leverage over Enron and took advantage.
- Beyond its credit line, Enron needed an extra $2 billion in cash. Banks refused to let it borrow the loans unsecured like before – now it demanded the only collateral remaining – the pipeline systems – and exclusive business with Enron for the next 18 months.
In early November, a possible savior came in a possible merger with smaller energy company Dynegy. Enron’s stock history does show temporary improvement.
- For years, Enron took pot shots at Dynegy for being a tiny wannabe and threatened to steamroll it in every business line. The Dynegy CEO now saw a chance to get even, inherit its valuable trading operations, and vault his company to leading position in energy trading.
- The structure – Dynegy would buy Enron at market price. ChevronTexaco (26% owner of Dynegy) would provide $2.5 billion ($1.5 billion now, $1 on closing).
- In reality, this was undercapitalized from the start – Enron assumed that having ChevronTexaco onboard would be so reassuring its capital needs would shrink.
- Dynegy estimated it would boost earnings per share by 35%, with over $200 billion in revenue and over $90 billion in assets.
- The traders weren’t happy about this deal. They had already felt they were carrying Enron, and now they felt small dumb Dynegy was unworthy of buying Enron. The traders banded together to demand bonuses in cash upfront, or they’d blow up the deal.
Meanwhile, the SEC required that Enron disclose the Fastow partnerships and restate its earnings on Thursday November 8.
- Also, all three ratings agencies cut Enron to one notch above junk by Nov 5. Shares went below $10.
- On Wednesday, the stock dropped 25% on news that Enron was unable to line up $2 billion from private investors.
On Friday, Enron announced the merger with Dynegy. Shares rose 16% to $10. This was a momentary relief in Enron share price history.
On Tuesday, November 13, $2 billion arrived for Enron. They took a breath, but it wasn’t enough.
- Enron realized it was going to need to repay more than $9 billion by the end of 2002. It would need a lot more money.
- Enron’s trading partners continued demanding collateral. The number of transactions plummeted, and trading profits crashed.
- An SPE (Rawhide) was structured to unwind if its debt had been downgraded to one step above junk. It now had to repay $690 million in debt.
- In six days, Enron had burned through a billion dollars. Its stock fell to below $5.
On Dynegy’s side, the lack of transparent disclosure of possible problems and Ken Lay’s insistence on maintaining control of Enron crashed the deal. The banks weren’t coming up with more money that Enron needed.
On Wednesday November 28, the rating agencies cut Enron into junk territory.
- This triggered $3.9 billion in debt.
- Dynegy officially canceled the deal.
- Enron Online shut down. Shares dropped to $0.61
Banks moved to minimize their losses, asking for return of collateral. Enron didn’t have it.
On Sunday, December 2, Enron filed for bankruptcy.
Here is the complete Enron stock history:
Enron’s stock price history shows the dramatic decline in the stock price once the company’s schemes were revealed. Take a look at Enron’s stock price history chart and notice the rapid growth and even faster decline.
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Here's what you'll find in our full The Smartest Guys in the Room summary :
- How Enron rose to become one of the world's most promising companies
- How Enron management's greed led it to start cutting corners
- The critical failures that crashed Enron's house of cards to the ground