Enron Mentions - 11/26/01 ,
 Dynegy Seems To Have Options In Enron Deal
The Wall Street Journal, 11/26/01
Volatility Fell Slightly in Light Holiday Trading As Enron Calls, Lilly Put=
s Attracted Interest
The Wall Street Journal, 11/26/01
The Other Instant Powerhouse in Energy Trading
BusinessWeek, 11/26/01
ALL EYES ON THE ENRON PRIZE If the deal holds, Dynegy will walk away with s=
ome juicy assets
BusinessWeek, 11/26/01
CONFUSED ABOUT EARNINGS? You're not alone. Here's what companies should do-=
-and what investors need to know
BusinessWeek, 11/26/01
END THE NUMBERS GAME
BusinessWeek, 11/26/01
FREE AND CLEAR OF ENRON'S WOES
BusinessWeek, 11/26/01
COMPANIES & FINANCE INTERNATIONAL - Enron still optimistic of averting fina=
ncial meltdown.
Financial Times, 11/26/01
Schwab Chief's Main Theme: Diversification
The Wall Street Journal, 11/26/01
Enron Pursuing a Cash Infusion Energy: Company is seeking as much as $1bill=
ion as it tries to shore up its endangered acquisition by Dynegy.
Los Angeles Times, 11/26/01

Dynegy Optimistic That Enron Merger Will Succeed - FT
Dow Jones International News, 11/26/01

Dynegy Purchase Prompts Antitrust Concerns, L.A. Times Says
Bloomberg, 11/26/01

Enron hopes for infusion of capital: Seeks US$500M as talks of Dynegy merge=
r continue
National Post, 11/26/01

India's Aditya Birla Not Eyeing Enron's Stake In Dabhol
Dow Jones International News, 11/26/01

The Enron scandal
Business Standard, 11/26/01

India's Mehta Comments on Birla Group Offer to Buy Enron Stake
Bloomberg, 11/26/01




Dynegy Seems To Have Options In Enron Deal
By Rebecca Smith and Robin Sidel
Staff Reporters of The Wall Street Journal

11/26/2001
The Wall Street Journal
A3
(Copyright (c) 2001, Dow Jones & Company, Inc.)

With the stock market telling Dynegy Inc. that energy trader Enron Corp. is=
n't worth even half what Dynegy has offered to pay, analysts and investors =
are paying close attention to the circumstances under which Dynegy could ba=
rgain a lower price or even walk away from the merger deal.=20
Earlier this month, Houston-based Dynegy offered to buy its far larger cros=
s-town rival in an all-stock deal that currently values Enron shares at $10=
.85 apiece, or a total of about $9.2 billion. But in the wake of post-agree=
ment disclosures by Enron that its future earnings are likely to be substan=
tially less than expected, the company's stock has been hammered. In 1 p.m.=
 trading on the New York Stock Exchange on Friday, Enron shares fell 30 cen=
ts to $4.71. The stock is down 94% so far this year and far short of the pe=
r-share takeover price. Dynegy shares rose 64 cents to $40.40.
Although Dynegy and Enron both say they are going ahead with the deal under=
 the terms negotiated, Dynegy does appear to have other options. The agreem=
ent with Enron contains a broad "material adverse change" clause as well as=
 some specific trigger points that could be invoked.=20
Dynegy officials performed "due diligence" throughout the holiday weekend, =
seeking to learn more about the intimate workings of Enron, which has suffe=
red a series of damaging blows. Since mid-October, Enron has disclosed that=
 some of its officers participated in personally enriching deals that moved=
 assets off Enron's balance sheet, for a time, to several private partnersh=
ips. Those deals are now the subject of a Securities and Exchange Commissio=
n investigation. Past treatment of some of those deals has been termed an "=
accounting error" by Enron and it twice has rejiggered its earnings since O=
ct. 16. At one point, Enron restated downwards nearly five years of earning=
s.=20
An Enron spokeswoman said the company was proceeding in the belief that the=
 deal would be completed as agreed. Dynegy spokesman John Sousa said the tw=
o sides are forging ahead although he acknowledged that the walk-away provi=
sions "are broad, by design, to ensure adequate protection for Dynegy share=
holders." Shareholders of both firms must still vote on the merger agreemen=
t.=20
Clauses related to a "material adverse change," also known as a "material a=
dverse effect," have been the focus of much attention among merger professi=
onals this year, due, in part, to the stock market's fluctuations and the e=
conomic slowdown that have caused some buyers to reconsider planned acquisi=
tions.=20
But such clauses rarely are invoked by a buyer or seller because they are c=
onsidered extremely difficult to prove. Both parties typically are reluctan=
t to lay out specific terms for canceling a deal, much the way a bride and =
groom often balk at negotiating a prenuptial agreement since it appears to =
envisage a breakup of the marriage even before it begins.=20
Furthermore, a key court case earlier this year affirmed widespread views t=
hat a buyer can't easily walk away from a merger. In that case, meat-proces=
sing concern Tyson Foods Inc. sought to cancel a planned acquisition of mea=
t-packer IBP Inc. due to a drop in IBP's earnings and a write-down of an IB=
P subsidiary. But a Delaware judge refused to let Tyson cancel the pact, sa=
ying Tyson had been aware of the cyclical nature of IBP's business and the =
accounting issue.=20
In a lengthy June 18 opinion, Delaware Chancery Court Vice Chancellor Leo E=
. Strine Jr. wrote that " . . . the important thing is whether the company =
has suffered a Material Adverse Effect in its business or results of operat=
ions that is consequential to the company's earnings power over a commercia=
lly reasonable period, which one would think would be measured in years rat=
her than months."=20
That interpretation has created ripples in the deal-making community, promp=
ting some transactions to include more details about circumstances under wh=
ich deals can be terminated. Since the Sept. 11 attacks, for example, a han=
dful of merger agreements have specified that future terrorist activity wou=
ld qualify as a "material adverse change," or MAC.=20
A key issue for any firm alleging there has been a material adverse change =
is "whether the new facts go to the guts of the strategic opportunity or is=
 it just a hiccup," says Meredith Brown, co-chairman of the mergers and acq=
uisitions group at law firm Debevoise & Plimpton in New York. He adds that =
a court "may be skeptical" if Dynegy claimed that Enron's post-merger agree=
ment disclosures were a surprise.=20
The Enron-Dynegy merger agreement includes several triggers permitting eith=
er side to seek termination. Enron can quit the deal if it receives a subst=
antially better offer, although it is prohibited from soliciting one. In su=
ch a case, it could be required to pay a $350 million "topper fee" to Dyneg=
y and its co-investor, ChevronTexaco Inc.=20
Dynegy can alter the deal if Enron faces "pending or threatened" litigation=
 liabilities that are "reasonably likely" to cost Enron $2 billion. If thos=
e liabilities hit $3.5 billion "an Enron material event will be deemed to h=
ave occurred," presumably allowing Dynegy to call the whole thing off. In s=
ome situations, Dynegy would be liable for a $350 million fee, as well.=20
Karen Denne, the Enron spokeswoman, said her firm doesn't believe that loss=
es arising from the normal course of business would qualify as a material e=
vent. The liability must result from litigation. Currently, the company fac=
es more than a dozen shareholder suits alleging breach of fiduciary duty by=
 officers and directors, issuing false and misleading reports and other off=
enses.=20
Deal makers who aren't involved in the combination say the steep drop in En=
ron's stock price since the merger agreement was signed wouldn't by itself =
give Dynegy the ability to cancel the pact or force Enron to renegotiate it=
s terms. Instead, they say, Dynegy would likely have to prove that Enron's =
worsening financial condition was an unanticipated event, which could be di=
fficult in light of the company's highly publicized problems and Dynegy's f=
requent statement that it clearly understands Enron's businesses. Still, th=
ere is another standard clause in the merger document that would allow Dyne=
gy to terminate the deal if "any representation or warranty of Enron shall =
have become untrue."=20
Other energy companies have abandoned deals following a widening gap in sto=
ck prices that changed an acquisition premium. Western Resources Inc. of To=
peka, Kansas last week sued Public Service Co. of New Mexico seeking hundre=
ds of millions of dollars in damages after it failed to buy Western's utili=
ties. The lawsuit accused Public Service of breaching its "duty of good fai=
th and fair dealing" and said the New Mexico company tried to "sabotage" th=
e deal as the two companies' stock prices diverged. Public Service denies t=
he accusations.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Options Report
Volatility Fell Slightly in Light Holiday Trading As Enron Calls, Lilly Put=
s Attracted Interest
By Cheryl Winokur Munk
Dow Jones Newswires

11/26/2001
The Wall Street Journal
B8
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW YORK -- The options market dozed, as many participants stayed home to r=
ecover from too much turkey and football.=20
The Chicago Board Options Exchange's market volatility index, or VIX, which=
 measures certain Standard & Poor's 100 Index option prices to gauge invest=
or sentiment, remained in a tight range during the abbreviated trading sess=
ion the day after Thanksgiving. It fell 0.53 to 24.79.
VIX typically ranges between 20 and 30. A rise indicates traders and money =
managers are becoming anxious about the stock market; a fall shows investor=
 optimism.=20
Volatility has been dropping from post-Sept. 11 levels in recent weeks amid=
 victories over the Taliban in Afghanistan and interest-rate cuts by the Fe=
deral Reserve and other central banks. VIX ranged between 30 and 40 for sev=
eral weeks following the attacks.=20
Volatility is likely to remain low, said Mika Toikka, head of options strat=
egy at Credit Suisse First Boston. "Typically, going into the Thanksgiving =
and December holidays, we tend to experience a seasonal drift lower in impl=
ied volatility. We would expect the same this year, especially in markets o=
utside the U.S. where volatility is still lingering at high levels," Mr. To=
ikka wrote in a recent research note.=20
The CBOE's Nasdaq Volatility index, or VXN, a sentiment barometer for the t=
echnology sector, fell 1.86 to 50.82 while the American Stock Exchange's Na=
sdaq volatility index, or QQV, dropped 1.03 to 42.74.=20
Elsewhere in the options market:=20
Calls in Enron Corp., the embattled Houston energy and trading company, con=
tinued to trade briskly, with one investor buying 10,000 January 5 calls an=
d simultaneously selling 12,250 January 10 calls.=20
More than 14,800 of the January 5 contracts traded, compared with open inte=
rest of 3,640, as shares fell 33 cents, or 6.6%, to $4.68. These calls cost=
 $1.40 on the American Stock Exchange where most of the volume was traded.=
=20
More than 15,000 of the January 10 contracts traded, compared with open int=
erest of 30,674. These out-of-the-money calls cost 30 cents on the Amex.=20
Eli Lilly & Co.'s December 80 out-of-the-money puts also were popular Frida=
y, as shares fell 91 cents, or 1.1%, to $82.42. Morgan Stanley cut its rati=
ng on the company to neutral from outperform, saying the stock has become t=
oo expensive even with Food and Drug Administration approval of its potenti=
al blockbuster drug Xigris, which treats septic infections. More than 3,000=
 of these puts traded, compared with open interest of 6,427. They cost $1.2=
5 on the CBOE, which saw much of the volume.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09


The Corporation: Acquisitions
The Other Instant Powerhouse in Energy Trading
By Louise Lee in San Mateo, Calif.

11/26/2001
BusinessWeek
96
(Copyright 2001 McGraw-Hill, Inc.)

It's not easy being No. 4. Despite a $35 billion merger completed in Octobe=
r, ChevronTexaco Corp. is still not one of the oil superpowers. Nor, at mor=
e than $90 billion a year in revenues, is it a scrappy little guy. So Chair=
man David J. O'Reilly has been searching for a strategy beyond just drillin=
g for more oil and gas.=20
Now, he may have something: a big stake in the No. 1 energy-trading company=
. Chevron Corp. has owned 26% of Dynegy Inc. since 1996, and with Dynegy's =
planned acquisition of Enron Corp., the top energy trader, ChevronTexaco is=
 making the oil industry's most aggressive push yet into this fast-growing =
business. It plans to eventually pump $2.5 billion into the combined Dynegy=
 and Enron to maintain its 26% stake, and it might raise that share. So, wh=
ile ChevronTexaco's much bigger rivals run small in-house trading operation=
s, energy trading may soon account for more than 10% of ChevronTexaco's ear=
nings. ``Chevron is now positioned to be a leader in the business,'' says a=
nalyst Arjun Murti at Goldman, Sachs & Co.
The deal would certainly dovetail with ChevronTexaco's strategy of becoming=
 a more integrated energy company, with a hand in everything from pumping o=
il at the wellhead to trading natural-gas futures. By acquiring Texaco, Che=
vron picked up, for instance, a big refining-and-marketing business --which=
 should balance out the bad times in oil and gas production, says Eugene No=
wak, an analyst at ABN Amro. ``When crude-oil prices are down, they'll have=
 margin improvements on refining and marketing,'' he says. O'Reilly and oth=
er ChevronTexaco executives declined to comment.=20
Until now, Dynegy wasn't a big deal for Chevron. Chevron purchased the stak=
e for $700 million when Dynegy was still called NGC Corp., and it filled th=
ree of the 14 board seats--positions it will keep. Since then, Chevron has =
sold nearly all its domestic natural-gas production to Dynegy. The stake ha=
s been a good investment: it is now worth $3 billion, ChevronTexaco says.=
=20
Sitting on $2.9 billion in cash as of the end of the second quarter, Chevro=
nTexaco can well afford the Dynegy deal, analysts say. And they expect O'Re=
illy to use some of that to make more buys; the most likely target is a nat=
ural-gas company. Maybe it's not so bad being No. 4.

Illustration: Chart: CHEVRON'S GROWING CASH HOARD=20
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

The Corporation: Acquisitions
ALL EYES ON THE ENRON PRIZE If the deal holds, Dynegy will walk away with s=
ome juicy assets
By Stephanie Anderson Forest, with Wendy Zellner in Dallas, and Peter Coy a=
nd Emily Thornton in New York

11/26/2001
BusinessWeek
94
(Copyright 2001 McGraw-Hill, Inc.)

As Houston-based Enron Corp. imploded amid a dizzying scandal over its fina=
nces, few would have blamed Dynegy Inc. CEO Charles L. Watson if he had sat=
 back and gloated. After all, Watson had watched as his bigger, brasher cro=
sstown rival sniffed at Dynegy's more cautious strategy, all the while garn=
ering most of the credit for reshaping the energy-trading business.=20
Instead, Watson picked up the phone on Oct. 24 and called Enron Chairman, C=
EO, and longtime acquaintance Kenneth L. Lay to ask how he could help. Lay =
didn't respond immediately, but as Enron's stock continued to plunge and th=
e company faced a cash squeeze, it became clear what the only realistic ans=
wer could be: Bail us out.
So two days later, Lay invited Watson to his River Oaks home near downtown =
Houston for breakfast to discuss a deal. Over muffins and ``a bad cup of co=
ffee'' the next day, Watson recalls, they sketched the outlines, and by 10 =
p.m. that night, the investment bankers were called in. On Nov. 9, Dynegy a=
nnounced that it would pay about $10 billion, plus the assumption of $13 bi=
llion in debt, to buy Enron, which is nearly four times its size. The key t=
o the deal was Dynegy's immediate $1.5 billion infusion of cash to shore up=
 Enron's balance sheet and save its credit rating. The money came from Dyne=
gy's 26% owner, ChevronTexaco Corp.=20
Without that help, Enron--the seventh-largest U.S. company, based on its $1=
00 billion in sales last year--may well have faced bankruptcy. Watson says =
that he never would have imagined such an outcome in his wildest dreams. ``=
I don't think anybody foresaw the problems [at Enron],'' he says. ``It's be=
en incredible to watch.''=20
Watson, 51, has to make good on what may well be his riskiest investment ye=
t. If he can pull it off, the new Dynegy will have revenues of more than $2=
00 billion and $90 billion in assets, including more than 22,000 megawatts =
of power-generating capacity and 25,000 miles of pipeline. It would control=
 an estimated 20% to 25% of the energy-trading market, up from about 6% now=
.=20
That would be sweet vindication for Watson's strategy. Dynegy backs trading=
 operations with hard assets such as power plants, which allows the company=
 to guarantee a supply of electricity to a buyer. In contrast, Enron has wo=
rked furiously to shed power plants and oil- and gas-generating fields, bel=
ieving it could earn higher returns using its trading and technology expert=
ise to tap assets owned by others in markets including steel, pulp, and pap=
er. IRRESISTIBLE BARGAIN. As Enron's stock slid below $9 from its August, 2=
000, high of $90, it became a bargain that Watson couldn't pass up. It woul=
d have taken years for Dynegy to build up a market-making operation to matc=
h Enron's. Its risk-management systems are top-of-the-line. Enron's commerc=
ial-services unit, which manages power supplies for corporate customers suc=
h as Wendy's International Inc., is three or four years ahead of Dynegy's, =
says Steve Bergstrom, president of Dynegy. Watson says he still plans to ge=
t rid of the $8 billion worth of assets Lay had earmarked for sale, includi=
ng the Portland (Ore.) General Electric plant and oil and gas assets in Ind=
ia. For the $1.5 billion, though, if the deal falls through Dynegy will hav=
e the right to Enron's prized Northern Natural Gas pipeline, worth an estim=
ated $2.25 billion. And Dynegy can walk away if Enron's legal liabilities e=
xceed $3.5 billion.=20
Watson firmly believes that Enron suffered from a crisis of confidence, not=
 a meltdown of its core business. Indeed, Enron's wholesale-trading operati=
on earned $2.3 billion last year. Says Watson: ``We know the business. We l=
ooked under the hood, and guess what? It's just as strong as we thought it =
was.''=20
But the trading profits were obscured in recent weeks by Enron's accounting=
 tricks. The biggest danger for Watson is that there are other time bombs t=
icking away. Already, the company has slashed its reported earnings since 1=
997 by $591 million, or 20% of its total, to account for controversial part=
nerships involving Enron officials. The Securities & Exchange Commission is=
 still investigating. ``We believe it will take more than just a couple of =
weeks and a long-term relationship [between Watson and Lay] to do all the n=
ecessary due diligence,'' says analyst Carol Coale of Prudential Securities=
 Inc. Dynegy's Bergstrom counters: ``We're pretty certain that most everyth=
ing of material consideration has been disclosed.'' If not? The massive ear=
nings boost provides ``a high margin of error,'' he says. A WANNABE. Of cou=
rse, regulators may object to the concentration of trading operations. And =
Watson will have to mesh two very different cultures. Enron is known for it=
s intense, even cutthroat entrepreneurial spirit. Dynegy's operations are m=
ore conservative; some compare it to a fraternity. Dynegy's decision to iss=
ue new stock options to some Enron employees may soothe battered egos. It s=
hould help, too, that Lay decided not to take the $60 million golden parach=
ute he could have received in a buyout. As it is, Lay will not have a manag=
ement job with the new company.=20
Dynegy often seemed to be an Enron wannabe, following it into online tradin=
g and commercial services. Still, Dynegy's 361% stock gains last year eclip=
sed Enron's 87% rise, and it rankled some that Lay's execs got more credit.=
 ``Chuck Watson may not have been in the spotlight, but he has always been =
at the forefront of this business,'' says Bruce M. Withers, who sold his Tr=
ident NGL Inc. to Dynegy in 1995. Watson will get more attention next year-=
-he's a 15% owner of the new Houston Texans pro football team. But with his=
 bold takeover of Enron, Watson has ensured that he's off the sidelines for=
 good.

Photograph: DYNEGY'S WATSON He says Enron's core business is strong. But ot=
hers worry that more accounting tricks will turn up PHOTOGRAPH BY NAJLAH FE=
ANNY/CORBIS SABA Illustration: Chart: POWERING UP AT DYNEGY CHART BY LAUREL=
 DAUNIS-ALLEN/BW=20
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Cover Story
CONFUSED ABOUT EARNINGS? You're not alone. Here's what companies should do-=
-and what investors need to know
By Nanette Byrnes and David Henry=20
With Mike McNamee in Washington

11/26/2001
BusinessWeek
76
(Copyright 2001 McGraw-Hill, Inc.)

In an age when giant earnings write-offs have become commonplace, it's hard=
 to shock Wall Street. But on Nov. 8, Enron Corp. managed to do it. After y=
ears of high-octane growth that had seen earnings surge by up to 24% a year=
, the Houston-based energy company acknowledged that results for the past t=
hree years were actually overstated by more than a half-billion dollars. It=
 was confirmation of investors' worst fears. Three weeks earlier, Enron had=
 announced a big drop in shareholders' equity, sparking fears that its hide=
ously complex financial statements were distorting its true performance. Ma=
nagement pointed to a number of factors, including a dubious decision to ex=
clude the results of three partnerships from its financial statements and a=
 billion-dollar error several years earlier that had inflated the company's=
 net worth.=20
Enron may be an extreme example of a company whose performance fell far sho=
rt of the glowing picture painted by management in its earnings releases, b=
ut it is hardly alone. This year, Corporate America is expected to charge o=
ff a record $125 billion, much of it for assets, investments, and inventory=
 that aren't worth as much as management thought (chart, page 79). Even if =
companies don't go back and restate earnings, as Enron is doing, those char=
ges cast doubt on the record-breaking earnings growth of the late '90s.
Not since the 1930s has the quality of corporate earnings been such an issu=
e--and so difficult for investors to determine. There's more at stake than =
the fortunes of those who bought shares based on misleading numbers. If eve=
n the most sophisticated financial minds can't figure out what a company ac=
tually earns, that has implications far beyond Enron. U.S. financial market=
s have a reputation for integrity that took decades to build. It has made t=
he U.S. the gold standard for financial reporting and the preeminent place =
to invest. It has also ensured ready access to capital for U.S. corporation=
s. That a company such as Enron, a member of the Standard & Poor's 500-stoc=
k index and one of the largest companies on the New York Stock Exchange, co=
uld fall so far so fast shows how badly that gold standard has been tarnish=
ed. ``The profession of auditing and accounting is, in fact, in crisis,'' s=
ays Paul A. Volcker, former chairman of the Federal Reserve and now one of =
the leaders of the International Accounting Standards Board.=20
Sometimes, as in the case of Enron, fuzzy numbers result from questionable =
decisions in figuring net earnings. More often, though, the earnings chaos =
results from a disturbing trend among companies to calculate profits in the=
ir own idiosyncratic ways--and an increasing willingness among investors an=
d analysts to accept those nonstandard tallies, which appear under a variet=
y of names, from ``pro forma'' to ``core.'' (Enron offers its own such vers=
ion. Before investors untangled the importance of Enron's first announcemen=
t, its stock rose briefly because it told investors that its ``recurring ne=
t income'' had met expectations.) The resulting murk makes it difficult to =
answer the most basic question in investing: What did my company earn?=20
Why calculate a second set of earnings in the first place? Because the numb=
ers reached by applying generally accepted accounting principles (GAAP) are=
 woefully inadequate when it comes to giving investors a good sense of a co=
mpany's prospects. Many institutional investors, most Wall Street analysts,=
 and even many accountants say GAAP is irrelevant. ``I don't know anyone wh=
o uses GAAP net income anymore for anything,'' says Lehman Brothers Inc. ac=
counting expert Robert Willens. The problem is that GAAP includes a lot of =
noncash charges and one-time expenses. While investors need to be aware of =
those charges, they also need a number that pertains solely to the performa=
nce of ongoing operations.=20
That's what operating earnings are supposed to do. But because they're calc=
ulated in an ad hoc manner, with each company free to use its own rules, co=
mparisons between companies have become meaningless. ``No investor--certain=
ly not any ordinary investor--can read these in a way that's useful,'' says=
 Harvey L. Pitt, chairman of the Securities & Exchange Commission. The SEC =
is examining whether new rules are needed to clarify financial reports and =
perhaps restrict use of pro formas.=20
What's badly needed is a set of rules for calculating operating earnings an=
d a requirement to make clear how they relate to net income. In the end, in=
vestors need two numbers--a standardized operating number and an audited ne=
t-income number--and a clear explanation of how to get from one to the othe=
r. ``OUT OF HAND.'' A widespread consensus is building to do just that. In =
early November, S&P proposed a set of rules for companies to follow when ta=
llying operating earnings. Only the week before, the Financial Accounting S=
tandards Board, the rulemakers for GAAP, had announced that they, too, woul=
d be taking up this issue. Volcker says the International Accounting Standa=
rds Board is also seeking a uniform definition of operating earnings.=20
``Over the past two or three years, the use of creative earnings measures h=
as grown and grown and grown to the point where it has really gotten out of=
 hand,'' says David M. Blitzer, S&P's chief investment strategist. ``Earnin=
gs are one of the key measures that anybody looks at when they're trying to=
 evaluate a company. If people want to use an operating-earnings measure, w=
e better all know what we're looking at.''=20
Without those standards in place, the gap between earnings according to gen=
erally accepted accounting principles and earnings according to Wall Street=
 is only going to grow wider and more confusing. Look at the variance in ea=
rnings per share calculated for the S&P 500 for the third quarter: It's $10=
.78 according to Wall Street analysts as tallied by Thomson Financial/First=
 Call, $9.17 according to S&P, and $6.37 according to numbers reported to t=
he SEC under GAAP. (S&P, like BusinessWeek, is owned by The McGraw-Hill Com=
panies.)=20
The lack of a standard measure can be costly to those who choose wrong. Use=
 First Call's earnings for the past four quarters and you get a relatively =
modest price-earnings ratio of 23 for the S&P 500. But run the numbers usin=
g GAAP earnings, and suddenly the market has a far steeper p-e of 38.=20
How did we get into this mess? Investors and analysts have been calculating=
 operating earnings for years, and for years, reasonable people could more =
or less agree on how to do it. Then came the dot-com bubble, along with inc=
reased pressure from Wall Street for companies to meet their quarterly earn=
ings forecasts. Suddenly, companies that hadn't turned a profit by any conv=
entional measure started offering ever more inventive earnings variants. Th=
ese customized pro forma calculations excluded a grab bag of expenses and a=
llowed upstart companies to show a profit. ``TOWER OF BABEL.'' Pro forma fo=
rmulas vary wildly from company to company and even from quarter to quarter=
 within the same company, casting doubt on their validity. And these days, =
the gulf between net earnings and pro forma earnings is wider than ever. S&=
P's tallies fall between the two: S&P's numbers are more systematic than pr=
o forma, but they aren't followed widely enough to be a standard. ``Investo=
rs are facing a Tower of Babel,'' says Robert K. Elliott, former chief of t=
he American Institute of Certified Public Accountants (AICPA) and a retired=
 KPMG partner. ``It's not standardized, and the numbers are not audited.''=
=20
That makes it tough to evaluate a company's performance. In the quarter end=
ed on Sept. 30, Nortel Networks Corp. offered shareholders at least three e=
arnings numbers to choose from. By conservative GAAP accounting, the teleco=
mmunications giant lost $1.08 a share. The company also provided two possib=
le pro forma options: a 68 cents loss that excluded ``special charges,'' in=
cluding some acquisition costs and restructuring charges, and a still bette=
r 27 cents loss that further excluded $1.9 billion of ``incremental charges=
,'' such as writing down inventories and increasing provisions for receivab=
les. Wall Street chose the rosiest one.=20
Confusing? You bet. Companies defend their pro forma calculations by pointi=
ng out that they're merely filling a void: Investors are clamoring for a me=
asure that gives them better insight into their company's future. The goal =
is to get to the core of the business and try to measure the outlook for th=
ose operations. ``There are good reasons why there is an emphasis on operat=
ing earnings,'' says Volcker. ``It is an effort to provide some continuity =
and some reflection of the underlying progress of the company.'' Besides, a=
s companies like to point out, they still have to report GAAP earnings, and=
 investors are free to ignore everything else.=20
There's no starker lesson in the shortcomings of GAAP than the $50 billion =
asset write-downs by JDS Uniphase Corp., the biggest charge of the year. Ne=
ar the height of the telecom bull market in July, 2000, the San Jose (Calif=
.) maker of fiber optics topped off a buying spree by acquiring competitor =
SDL Inc. for $41 billion in stock. When the deal closed in February, its as=
sets ballooned from $25 billion to $65 billion. But by then, shares of JDS =
and other fiber-optics makers were collapsing. To bring its acquisitions in=
to line with their new value, the company took charges of $50 billion. Desp=
ite the fact that the bulk of its losses stemmed from stock transactions an=
d involved no cash paid, GAAP required that the charges be taken out of net=
 income. So according to GAAP, JDS lost $56 billion in the fiscal year endi=
ng in June--a staggering figure for a company whose revenues over the past =
five years added up to only $5 billion.=20
Analysts and the company argue that besides not involving cash, the charge-=
off was all about the past, a right-sizing of values that had gotten out of=
 hand. To analyze the company's prospects, they excluded the $50 billion ch=
arge. ``The accounting is not designed to make things look better but to de=
scribe what happened,'' says JDS Uniphase Chief Financial Officer Anthony R=
. Muller, ``and we'll live with the consequences, whatever they are.'' Anal=
ysts make a similar defense. ``My goal is to figure out what the business i=
s going to produce so that we can value the company,'' says Lehman Brothers=
 analyst Arnab Chanda. GLACIAL PACE. Are JDS's pro forma numbers realistic-=
-a fair gauge of JDS's ongoing operations? Right now, it's hard for investo=
rs to judge. And that's the kind of ambiguity S&P and others would like to =
eliminate. In November, S&P circulated a memo on how to standardize operati=
ng earnings. Under the proposal, operating earnings would include the costs=
 of purchases, research and development, restructuring costs (including sev=
erance), write-downs from ongoing operations, and the cost to the company o=
f stock options. It would exclude merger-and-acquisition expenses, impairme=
nt of goodwill, litigation settlements, and the gain or loss on the sale of=
 an asset.=20
When S&P applied roughly that formula to JDS Uniphase, it split the differe=
nce between Wall Street and GAAP. Because of differences in what each group=
 included in their earnings calculations, the results were chaotic. Using G=
AAP, the company lost $9.39 a share. S&P figures it lost $3.19, while the c=
ompany put the loss at 36 cents. Meanwhile, Wall Street says it made 2 cent=
s.=20
The S&P standard may make sense, but it raises the question: Where is the F=
inancial Accounting Standards Board, the group in charge of GAAP? Chairman =
Edmund L. Jenkins says FASB will be addressing the problems. Still, investo=
rs shouldn't expect any improvement soon. The pace of change at FASB tends =
to be glacial. It typically takes four years to complete a new standard. In=
 1996, for example, the board realized that standards on restructuring char=
ges had some big loopholes and it resolved to put the issue on its agenda. =
In June, 2000, the board finally issued a draft of a new standard, asked fo=
r comments, and held a public hearing. In October, 2001, the board said it =
still wasn't ready to put a fix in place. Now, the recession has set off an=
other wave of restructuring charges, and the FASB still doesn't have new ru=
les.=20
The slow pace means the standard-setters sometimes fail to react to sudden =
changes in the market. The most recent failure followed the terrorist attac=
ks on September 11. An FASB task force, unable to come up with a set of rul=
es for separating September 11 costs from general expenses, instead told co=
mpanies that the disaster could not be treated as an extraordinary item. So=
 GAAP earnings include costs stemming from the disaster as part of a compan=
y's general performance. Many companies have nevertheless broken those cost=
s out in their unaudited press releases.=20
Many more are likely to do so in the fourth quarter. Indeed, 2001 is shapin=
g up to be one for the record books. A poor economy and the devastating aft=
ereffects of September 11 have resulted in a slew of unusual charges that a=
re unlikely to recur and that no one could have foreseen. But there's a gro=
wing concern that the earnings fog is providing managers with cover to hide=
 missteps of the past within that vast category of supposedly one-time char=
ges. The temptation will be to take as big a charge as possible now, while =
investors are braced for bad news. Not only can managers sweep away yesterd=
ay's errors, but tomorrow's earnings will look even better.=20
The basic question comes down to what constitutes a special expense--a char=
ge so unusual that to include it in the earnings calculation would be to di=
stort the truth about a company's performance. Usually, big charges fall in=
to a few categories, including charges for laying off workers and restructu=
ring a company, charges for assets that have lost value since they were pur=
chased, charges for investments that have lost value, and charges for inven=
tory that has become obsolete. In a recent study, Harvard Business School p=
rofessor Mark T. Bradshaw found that companies are increasingly calling the=
se charges unusual. That gives them a rationale for excluding them from the=
ir pro forma calculations.=20
Lots of critics disagree, saying such charges are often an inevitable part =
of the business cycle and should be reflected in a company's earnings histo=
ry. They certainly should not be ignored by investors. ``Charges are real s=
hareholder wealth that's been lost,'' argues David W. Tice, manager of the =
Prudent Bear Fund, a mutual fund with a pessimistic bent that's up 17% so f=
ar this year. ``It's money they spent on something no longer worth what it =
was, a correction of past earnings, or a reserve for costs moving forward. =
Whatever the reason, it's a real cost to the company, and that hurts shareh=
olders.'' Without standards, excessive write-offs from operating earnings c=
an obscure actual performance. Without any rules, companies calculate opera=
ting earnings inconsistently in order to put their companies in the best po=
ssible light. Dell Computer Corp. is a good example of this ``heads I win, =
tails you lose'' school of accounting. For years, Dell benefited from gains=
 in its venture-capital investments and was happy to include those gains in=
 its reported earnings, where they appeared as a separate line on the incom=
e statement. But this year, when those gains turned to losses, the computer=
 maker issued pro forma numbers that excluded that $260 million drag. Dell =
spokesman Michael Maher says the company's press releases and SEC filings b=
reak out investment income and give GAAP numbers as well as pro forma. ``In=
 our view, the numbers are reported clearly,'' says Maher. ``It's all out t=
here for the consuming public.'' PAST PUFFERY. Many experts believe special=
 charges are a sign that past performance was exaggerated. What should inve=
stors make of a company such as Gateway Inc.? Two restructuring charges in =
the first and third quarters, minus a small extraordinary gain, totaled $1.=
12 billion, or about $100 million more than the company made in 1998, 1999,=
 and 2000 combined. Which is the truer picture of its performance and poten=
tial? The write-offs or the earnings? Write-offs for customer financing are=
 another example. When Nortel increased its reserves for credit extended to=
 customers by $767 million in September, it effectively admitted it had boo=
ked sales in the past to companies that couldn't pay--in effect overstating=
 its performance in those earlier periods. In addition, Nortel says booking=
 sales and accounting for credit are unrelated issues. Tech companies blame=
 the sharp downturn in their industry for the big write-offs. And these are=
n't isolated examples. Peter L. Bernstein, publisher of newsletter Economic=
s & Portfolio Strategy, found that from 1989 to 1993, 20% of earnings vanis=
hed into write-offs.=20
Big charge-offs can also distort future performance. Critics contend that e=
xcess reserves are often used as a sort of ``cookie jar'' from which earnin=
gs can be taken in future quarters to meet Wall Street's expectations. Or c=
harges taken this year, for example, which is apt to be a lousy one for mos=
t companies anyway, might include costs that would otherwise have been take=
n in future periods. Prepaying those costs gives a big boost to later earni=
ngs. Rules for figuring operating earnings would help, but this is an area =
that will always involve a certain amount of judgment--and therefore invite=
 a certain amount of abuse. ``People are going to write off everything they=
 can in the next two quarters because they're having a bad year anyway,'' s=
ays Robert G. Atkins, a Mercer Management consultant.=20
Part of the lure of big special charges is that investors tend to shrug the=
m off, believing that with the bad news out in the open, the company is poi=
sed for a brighter future. Since Gateway detailed its third-quarter charge =
of $571 million on Oct. 18, Wall Street has bid the stock up 48%, compared =
with a 6% runup for the S&P 500.=20
Often, though, investors should take exactly the opposite message. If, for =
example, part of a restructuring involves slashing employee training, infor=
mation-technology spending, or research and development, the cuts could dep=
ress future performance, says Baruch Lev, a professor of accounting at the =
Stern School of Business at New York University. ``Are these really one-tim=
e events?'' he asks. ``Or is this the beginning of an avalanche?'' Indeed, =
Morgan Stanley Dean Witter & Co. strategist Steve Galbraith has found that =
in the year following a big charge-off to earnings companies have underperf=
ormed the stock market by 20 percentage points. ``LA LA LAND.'' Investors a=
re apt to be faced with more huge write-offs next year, even if the economy=
 doesn't continue to worsen. Why? The transition to a new GAAP rule that ch=
anges the way companies account for goodwill--a balance-sheet asset that re=
flects the amount paid for an acquisition over the net value of the tangibl=
e assets. Under the new rule, companies will have to assess their propertie=
s periodically and decrease their worth on the balance sheet if their value=
 falls. An informal survey by Financial Executives International of its mem=
ber controllers and financial officers found that at least a third expect t=
o take more charges.=20
But figuring out the proper value of those assets is no easy task. Unless t=
here is a comparable company or factory with an established market price, v=
aluing them involves a lot of guesswork for which there are no firm rules. =
``What this is really coming down to is corporations and their auditors com=
ing up with their own tests for impairment,'' says the Stern School's Profe=
ssor Paul R. Brown. ``It's La La Land.''=20
While the tidal wave of special charges is providing cover for earnings gam=
es, it could also be an impetus for change--especially in the wake of the d=
ot-com fiasco. Indeed, there are some signs of a backlash. The real estate =
investment trust industry was a pioneer of engineered earnings, with its ``=
funds from operations,'' or FFO. But now some REITs have begun to revert to=
 plain old GAAP earnings. Hamid R. Moghadam, CEO of San Francisco-based AMB=
 Property Corp., shifted back to GAAP in 1999. ``The reason I don't like FF=
O is very simple,'' says Moghadam. ``One company's numbers look better than=
 another one's even if they had identical fundamental results.''=20
There are other steps FASB could take to improve financial reporting and re=
store GAAP's status. Trevor S. Harris, an accounting expert at Morgan Stanl=
ey, says it could force companies to make clear distinctions between income=
 from operations and income from financial transactions. Lehman's Willens s=
ays companies should provide more information on cash expenses and how they=
 bear on earnings. An easy step would be to require companies to file their=
 press releases with the SEC.=20
At the least, says Lev, companies must clearly explain how their pro forma =
numbers relate to the GAAP numbers. Otherwise, he says, investors ``see num=
bers floating there, and where did they come from?'' In today's environment=
 of unregulated pro forma calculations and supersize write-offs, no questio=
n is more important to investors.

High-Gloss Glossary
Companies are using a variety of accounting practices to put the best spin =
on
their results. Here's what those terms mean:
DEFINING EARNINGS:
NET INCOME
The bottom line, according to generally accepted accounting principles (GAA=
P).
Sometimes called ``reported earnings,'' these are the numbers the Securitie=
s &
Exchange Commission accepts in its filings.
OPERATING EARNINGS
An adjustment of net income that excludes certain costs deemed to be unrela=
ted
to the ongoing business. Although it sounds deceptively like a GAAP figure
called ``operating income'' (revenue minus the costs of doing business), it=
 is
not an audited figure.
CORE EARNINGS
Another term for operating earnings. Neither core nor operating earnings ar=
e
calculated according to set rules. They can include or exclude anything the
preparer wishes.
PRO FORMA EARNINGS
The 1990s term for operating earnings. Popularized by dot-coms, it sometime=
s
excludes such basic costs as marketing and interest.
EBITDA
Earnings before interest, taxes, depreciation, and amortization. The
granddaddy of pro forma, it was initially highlighted by industries that
carried high debt loads, such as cable TV, but has since come to be widely
quoted.
ADJUSTED EARNINGS
A new term for pro forma.
DEFINING COSTS:
SPECIAL CHARGES
A general term for anything a company wants to highlight as unusual and
therefore to be excluded from future earnings projections.
ASSET IMPAIRMENTS
Charges taken to bring something a company paid a high price for down to it=
s
current market value. Many companies are now taking these charges on intern=
al
venture-capital funds that bought Internet and other high-tech stocks at
inflated prices.
GOODWILL IMPAIRMENTS
The same idea as asset impairments except they're used to write down the
premium a company paid over the fair market value of the net tangible asset=
s
acquired. These charges will explode in the first quarter of 2002 because o=
f a
change in mergers-and-acquisitions accounting that eliminates goodwill
amortization and requires holdings to be carried at no more than fair value=
s.
RESTRUCTURING RESERVES
An accrued expense (not usually cash) to cover future costs of closing down=
 a
portion of a business, a plant, or of firings. These are projected costs an=
d
if overstated can later become a boost to earnings as they are reversed.
WRITE-DOWN
Lowering the value of an asset, such as a plant or stock investment. It is
often excused as a bookkeeping exercise, but there may have been a real cos=
t
long ago that now proves ill spent, or there may have been associated cash
costs, such as investment-banking fees.
Illustration: Chart: THE BIG BATH CHART BY ERIC HOFFMANN/BW=20
Illustration: Chart: EARNINGS CHAOS CHART BY ERIC HOFFMANN/BW=20
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09


Editorials
END THE NUMBERS GAME

11/26/2001
BusinessWeek
130
(Copyright 2001 McGraw-Hill, Inc.)

What did the company earn? That's the most basic question an investor can e=
ver ask. The equity culture that has generated so much growth over the year=
s depends on a clear answer, but getting one has become impossible. Enron C=
orp. just announced that its earnings for the past three years were oversta=
ted by half a billion dollars. How did one of the biggest companies on the =
New York Stock Exchange manage to inflate its earnings by 20% without audit=
ors, analysts, ratings agencies, and the business press (BusinessWeek inclu=
ded) discovering it? In part, blame the breakdown of standardized accountin=
g rules and the anarchy that runs rampant in the financial statements of Co=
rporate America. The U.S. needs a new set of accounting rules that gives a =
clear picture of financial performance. Without integrity in financial repo=
rting, the U.S. cannot hope to remain the preeminent place to invest in the=
 global marketplace (page 76).=20
The dot-com bubble was the first indication that there was something seriou=
sly wrong with accounting standards. Companies without much of a business m=
odel customized their quarterly statements to exclude a grab bag of expense=
s in order to put a positive financial spin on their operations. Wall Stree=
t conspired in this and encouraged big companies to join in. Soon, the meth=
od of calculating earnings began to vary from company to company and even f=
rom quarter to quarter within a company. It is now chaos.
A stricter adherence to accounting rules won't solve the entire problem. GA=
AP, the generally accepted accounting principles, allow all kinds of one-ti=
me expenses and noncash charges. This obscures the performance of ongoing o=
perations. No one can fathom what are true operating earnings because there=
 are no guidelines as to what constitutes an extraordinary expense. The res=
ult is total confusion. Take earnings per share for the Standard & Poor's 5=
00-stock index for the second quarter. Under Thomson Financial/First Call s=
tandards, it is $11.82. But it's $9.02 according to S&P and $4.83 under GAA=
P. How can investors make intelligent decisions?=20
The Financial Accounting Standards Board clearly is failing to do its job. =
It has promised to write a set of rules that calculates operating earnings =
and relates them to net earnings, but it hasn't delivered. The rating agenc=
y Standard & Poor's (owned by The McGraw-Hill Companies, as is BusinessWeek=
) is doing a better job. It recently drew up a definition of ``operating ea=
rnings'' that includes restructuring costs (including severance), writedown=
s from ongoing operations, and the cost of stock options. It excludes merge=
r and acquisition expenses, litigation settlements, impairment of goodwill,=
 and gains or losses on asset sales. This is a beginning that FASB should b=
uild on. The accounting anarchy has to end.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Up Front: AFTERLIVES
FREE AND CLEAR OF ENRON'S WOES
Edited by Sheridan Prasso=20
By Stephanie Anderson Forest

11/26/2001
BusinessWeek
16
(Copyright 2001 McGraw-Hill, Inc.)

Back in Enron's heyday, one of its rising stars was Rebecca Mark. Nicknamed=
 ``Mark the Shark'' because of her ferocious ambition, she made her name in=
 the early '90s building the energy giant's international operations, inclu=
ding the now-troubled Dabhol power plant in India. Once rumored to be a suc=
cessor to Enron CEO Ken Lay, she resigned from Enron in August, 2000, after=
 two years of heading Enron's ailing water company spin-off, Azurix.=20
These days, as Enron struggles to stay afloat, Mark-Jusbasche (who hyphenat=
ed her name with that of her husband of two years) is watching the action f=
rom the sidelines. And she'd like to keep it that way. ``I'm very surprised=
 and saddened by [what has happened at Enron], and I wish them all the best=
,'' she says. Beyond that, Mark-Jusbasche, 47, is not much interested in ta=
lking about Enron, which is being acquired by a small rival after a spectac=
ular Wall Street flameout. Mark left Enron with millions of dollars worth o=
f Enron shares, although she says she has sold them since.
Mark-Jusbasche spends most of her time serving on advisory boards, both at =
Yale and Harvard business schools, as well as the school where her 16-year-=
old twin sons from a previous marriage are sophomores.=20
In her spare time, she seeks out opportunities for investing. Currently, Ma=
rk-Jusbasche is considering alternative-energy and water-technology compani=
es. A farm girl from Missouri, she has one investment focus that's especial=
ly dear to her heart: looking into expanding her cattle ranches. She now ow=
ns 15 acres in New Mexico. ``I'm doing things that are fun, interesting, an=
d important to me--family and community,'' she says. Sure beats being anywh=
ere near Enron.

Photograph: MARK: Now just a bystander PHOTOGRAPH BY BRETT COOMER/AP/WIDE W=
ORLD=20
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

COMPANIES & FINANCE INTERNATIONAL - Enron still optimistic of averting fina=
ncial meltdown.
By ANDREW HILL and SHEILA MCNULTY.

11/26/2001
Financial Times
(c) 2001 Financial Times Limited . All Rights Reserved

Enron said yesterday it was still expecting outside investors to inject $50=
0m to $1bn into the group, as talks continued to avoid a financial meltdown=
 at the energy trading group.=20
Dynegy, whose rescue bid for its Houston rival is crucial to Enron's surviv=
al, spent last week's Thanksgiving holiday and the weekend reviewing Enron'=
s operations and finances.
Dynegy said it remained "optimistic for the potential of the merger to be c=
ompleted, and in the time-frame we originally announced - six to nine month=
s".=20
Enron's fate depends on a delicate, unofficial pact between its lenders, Dy=
negy, and credit ratings agencies, which have resisted downgrading the grou=
p's debt while the deal is pending.=20
If the pact stays in place, at least $500m is likely to be invested in Enro=
n by JP Morgan Chase and Citigroup, Enron's key lenders and advisers. A fur=
ther $500m is being sought from private equity firms.=20
But if Dynegy pulls out of the deal, the cash infusion could be put in jeop=
ardy and the ratings agencies could downgrade the debt to junk, triggering =
debt repayments across a network of partnerships and off-balance-sheet vehi=
cles linked to Enron.=20
Enron confirmed yesterday that it was still seeking additional liquidity fr=
om new equity investors, but would not discuss their identities.=20
Enron's crisis of confidence became more acute last week when the shares fe=
ll from $9 to $4.74 following a regulatory filing that revealed the extent =
of the group's debt burden.=20
Completion of a $1bn secured credit line from JPM Chase and Citigroup, and =
the postponement of a $690m notes repayment due tomorrow were not sufficien=
t to prop up the share price. The bonds also fell to levels consistent with=
 a potential bankruptcy filing.=20
The slide in the share price has encouraged speculation that Dynegy is prep=
aring to renegotiate its all-stock bid, now worth $9.3bn, compared with Enr=
on's market value of $3.5bn.=20
But people close to Enron say renegotiation of the deal would not in itself=
 have any impact on the energy group's finances. Latest news, www.ft.com/en=
ron.=20
(c) Copyright Financial Times Ltd. All rights reserved.=20
http://www.ft.com.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Schwab Chief's Main Theme: Diversification
By Lynnette Khalfani
Dow Jones Newswires

11/26/2001
The Wall Street Journal
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW YORK -- More than two months after the Sept. 11 terrorist attacks, many=
 investors remain edgy. But the stock market, after an initial selloff, has=
 shown remarkable resilience.=20
Few observers expect stock-market volatility to subside soon. Still, expert=
s say that now, more than ever, is the time for skittish investors to keep =
their wits about them.
In a recent interview, Charles R. Schwab, chairman and co-chief executive o=
f Charles Schwab & Co., the San Francisco-based online and discount brokera=
ge firm, gave his views on what investors should be doing -- and what mista=
kes they should avoid.=20
Here are some excerpts from the interview:=20
In the wake of the Sept. 11 attacks, how much more risk, if any, do you thi=
nk is in the financial markets? Or do you think it's just that people's per=
ceptions about risk have changed?=20
I've been investing since 1959, and I have to say that, year after year, th=
e risk hasn't changed. The risk is always there. There's risk in investing =
in stocks, bonds and even U.S. Treasuries because of interest-rate [fluctua=
tions]. There's risk in real estate, too.=20
So the question is: How do you handle it? The best way is to diversify. Ove=
r a long period of time, people who diversify their investments do pretty d=
arned well. When they don't . . . sometimes it's fatal. If the only stock a=
n investor owned was Enron . . . or Cisco at 70, that was pretty fatal.=20
What do you say to people who say they're too scared to invest right now? T=
hat because of the threat of terrorism, the anthrax scares, the war in Afgh=
anistan, the recession, and so forth, there's just too much uncertainty in =
the markets?=20
I remember back during the Cuban missile crisis, we all feared the worst. W=
e were all building bomb shelters. It was a scary time. This terrorist thin=
g is no different. It's awful -- particularly for our children. But this co=
untry is so wealthy, in terms of its resources, intellectual capital and th=
e strength of our government.=20
There is no more uncertainty today than in times past. For example, we've h=
ad many recessions. It's not fun, especially when you begin reading about a=
ll these layoffs. In fact, I think the unemployment rate [now at 5.4%] pret=
ty easily might get to 6.5% before it gets better. And it probably won't ge=
t better until March or April. Also, the stock market will go up, hopefully=
 before the economy goes up.=20
There's $2 trillion sitting in money-market accounts. That's a huge resourc=
e and buying power that's definitely available for new investments.=20
What do you think is the biggest mistake investors have made over the past =
two or so months?=20
They let their emotions take over. With the fear that people had, they didn=
't use their rational thinking. They used their emotional thinking. [After =
Sept. 11], they sold at the low, and fear was the driver.=20
Just a year and a half ago, the driving emotion was greed. You're not going=
 to avoid this stuff. So the issue is how you manage through these cycles o=
f fear and greed. Even when I'm fearful of something, I say to myself: "Thi=
s is still the time to invest."=20
My biggest worry right now is that people will give up and say, "I just don=
't want to be in the stock market at all." And it's just the time that peop=
le should be hanging on and keeping a diversified portfolio.=20
Some other mistakes: A lot of people hang on to the stock that was the post=
er child of the last cycle. Or people say, "I'll get back in [the market] w=
hen I see the economy turn around." Well, by the time they see that, it's t=
oo late. They will have missed the whole ride back up.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Business; Financial Desk
Enron Pursuing a Cash Infusion Energy: Company is seeking as much as $1bill=
ion as it tries to shore up its endangered acquisition by Dynegy.
From Bloomberg News

11/26/2001
Los Angeles Times
Home Edition
C-2
Copyright 2001 / The Times Mirror Company

HOUSTON -- Enron Corp. said talks are continuing with potential investors f=
or an infusion of as much as $1 billion as the biggest energy trader tries =
to avoid a collapse of its planned purchase by Dynegy Inc.=20
An investment would ease concern that Enron's weakened finances may prompt =
Dynegy to pull out of or renegotiate the terms of the transaction, which is=
 valued at $23 billion in stock and assumed debt.
Enron is seeking an additional $500 million to $1 billion in cash but would=
n't divulge details. "We are not going to discuss the particulars of who we=
 are talking to," Enron spokeswoman Karen Denne said Sunday.=20
Shares of the Houston company fell by 48% in the last three trading session=
s on the New York Stock Exchange. At Friday's closing price of $4.71, the s=
tock sells for less than half the $10.85 that Dynegy is slated to pay in th=
e acquisition. That's a sign investors are skeptical the transaction will g=
o through as planned.=20
Enron is likely to have approached Kohlberg, Kravis Roberts & Co., Blacksto=
ne Group and Carlyle Group for a private equity investment, said industry a=
nalyst David Snow of PrivateEquityCentral.Net.=20
The firms have declined to comment.=20
In a conference call Nov. 14, Enron Chief Financial Officer Jeffrey McMahon=
 said the company is in talks with several private investors and expects to=
 receive $500 million to $1 billion from those sources.=20
On Wednesday, Enron got a three-week reprieve from lenders on a $690-millio=
n note due this week, gaining more time to restructure its finances. Dynegy=
 Chief Executive Chuck Watson said he was "encouraged" by the commitment to=
 extend the note payment as well as the closing of a $450-million credit fa=
cility. He said Dynegy remained committed to the purchase.=20
Enron already received $1.5 billion in cash Nov. 13 from ChevronTexaco Inc.=
 as part of the Dynegy buyout agreement. In return, Dynegy received preferr=
ed stock and other rights in an Enron unit that owns the Northern Natural G=
as Co. pipeline. Under the deal's terms, if Dynegy and Enron fail to merge,=
 Dynegy can acquire the pipeline company.=20
But Barron's reported over the weekend that Dynegy's right to the pipeline =
might be challenged by J.P. Morgan Chase & Co. and Salomon Smith Barney Inc=
., which accepted the asset as collateral for $1billion in loans to Enron.=
=20
Dynegy spokesman John Sousa declined to comment on Enron's attempts to secu=
re financing or whether more cash for Enron is a condition of keeping the m=
erger alive.=20
Enron's dealings with affiliated partnerships have led to a federal investi=
gation of the company, which restated its earnings and saw its credit ratin=
gs cut.=20
The company said in a Securities and Exchange filing a week ago that it has=
 less than $2 billion in cash and credit lines left.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Dynegy Optimistic That Enron Merger Will Succeed - FT

11/26/2001
Dow Jones International News
(Copyright (c) 2001, Dow Jones & Company, Inc.)

LONDON -(Dow Jones)- Dynegy Inc. (DYN) remains optimistic, after further re=
view of Enron Corp.'s (ENE) finances last week, that it will be able to buy=
 the company, the Financial Times reported Monday.=20
Dynegy said that it, "remained optimistic for the potential of the merger t=
o be completed, and in the time frame we originally announced - six to nine=
 months," the FT reported.
Critical investment in Enron by J.P. Morgan Chase and Citigroup will procee=
d only if an unofficial pact between Enron, Dynegy, and Enron's lenders and=
 credit rating agencies remains intact, the report said. Investment from th=
ese two is likely to total between $500 million and $1 billion, while Enron=
 continues to look for a further $500 million from private equity firms.=20
The deal suffered a setback last week, when a regulatory filing revealed a =
greater debt burden than some investors had realized. Enron's share price f=
ell following the report, to $4.74 from $9.00.=20
A $1 billion secured credit line from J.P. Morgan Chase and an extension of=
 a $690 million repayment due Tuesday weren't enough to keep the share pric=
e from falling. This led to speculation that Dynegy was considering renegot=
iating its all-stock bid, now at $9.3 billion, compared with Enron's market=
 value of $3.5 billion, said the report.=20
Renegotiating the deal wouldn't have any impact on Enron's finances, unname=
d sources told the FT.=20
But if Dynegy pulled out of the deal altogether, there might be no cash inf=
usion from J.P. Morgan chase and Citigroup. Credit ratings agencies could t=
hen downgrade Enron's debt to junk, forcing partners to repay debts, the re=
port said.=20
-By Sarah Spikes, Dow Jones Newswires; +44-(0)20-7842-9345; sarah.spikes@do=
wjones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Dynegy Purchase Prompts Antitrust Concerns, L.A. Times Says
2001-11-26 07:36 (New York)


     Washington, Nov. 26 (Bloomberg) -- California Attorney
General Bill Lockyer is examining Dynegy Inc.'s proposed
acquisition of rival energy seller Enron Corp. for possible
antitrust violations, the Los Angeles Times reported.

     The California Independent System Operator, which manages the
state's electric grid, has asked federal regulators to ban Dynegy
and other major power sellers, including Mirant, and AES Corp.'s
Williams Cos., from selling electricity at market prices in the
state, the Times said.

     Throughout the state's power crisis, Governor Gray Davis and
other officials accused Dynegy, Enron and other power companies of
withholding electricity and manipulating the cost of wholesale
power to gouge consumers, the Times said.

     Enron is negotiating with bankers to restructure $9.15
billion in debt.

     ``I would hope that the people who look at the antitrust
implications would consider this one carefully,'' California State
Senator Steve Peace, a Democrat, told the Times. ``If anything,
Dynegy would be in an even stronger position to be able to
manipulate markets than it was before.''



Financial Post: News
Enron hopes for infusion of capital: Seeks US$500M as talks of Dynegy merge=
r continue
Andrew Hill and Sheila McNulty
Financial Times

11/26/2001
National Post
National
FP3
(c) National Post 2001. All Rights Reserved.

Enron Corp. said yesterday it was still expecting outside investors to inje=
ct US$500-million to US$1-billion into the group, as talks continued to avo=
id a financial meltdown at the energy trading group.=20
Dynegy Inc., whose rescue bid for its Houston-based rival is crucial to Enr=
on's survival, spent last week's U.S. Thanksgiving holiday and the weekend =
reviewing Enron's operations and finances.
Dynegy said it remained "optimistic for the potential of the merger to be c=
ompleted, and in the time-frame we originally announced -- six to nine mont=
hs."=20
Enron's fate depends on a delicate, unofficial pact between its lenders, Dy=
negy, and credit ratings agencies, which have resisted downgrading the grou=
p's debt while the deal is pending.=20
If the pact stays in place, at least US$500-million is likely to be investe=
d in Enron by JP Morgan Chase and Citigroup, Enron's key lenders and advise=
rs. A further US$500-million is being sought from private equity firms.=20
But if Dynegy pulls out of the deal, the cash infusion could be put in jeop=
ardy and the ratings agencies could downgrade the debt to junk, triggering =
debt repayments across a network of partnerships and off-balance-sheet vehi=
cles linked to Enron.=20
Enron confirmed yesterday it was still seeking additional liquidity from ne=
w equity investors, but would not discuss their identities.=20
Enron's crisis of confidence became more acute last week when the shares fe=
ll to US$4.74 from US$9 after a regulator filing that revealed the extent o=
f the group's debt burden.=20
Completion of a US$1-billion secured credit line from JPM Chase and Citigro=
up, and the postponement of a US$690-million notes repayment due tomorrow, =
were not sufficient to prop up the share price. The bonds also fell to leve=
ls consistent with a potential bankruptcy filing.=20
The slide in the share price has encouraged speculation Dynegy is preparing=
 to renegotiate its all-stock bid, now worth US$9.3-billion, compared with =
Enron's market value of US$3.5-billion.=20
But people close to Enron say renegotiation of the deal would not in itself=
 have any impact on the energy group's finances.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09



India's Aditya Birla Not Eyeing Enron's Stake In Dabhol

11/26/2001
Dow Jones International News
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW DELHI -(Dow Jones)- India's Aditya Birla Group on Monday denied local m=
edia reports that said it is considering acquiring U.S. energy company Enro=
n Corp.'s (ENE) stake in Dabhol Power Co.=20
"I have checked with our directors and can tell you that the Aditya Birla G=
roup has shown no expression of interest in Dabhol," said group spokeswoman=
 Pragnya Ram.
The Economic Times and Financial Express reported the group is exploring th=
e possibility of submitting an expression of interest with Indian financial=
 institutions to buy Enron's stake in Dabhol.=20
Dabhol is a 2,184-megawatt power plant located in Maharashtra state.=20
Enron holds a controlling 65% stake in Dabhol. Costing $2.9 billion, the po=
wer project is the single largest foreign investment in India to date.=20
Aditya Birla Group is a leading Indian conglomerate whose interests include=
 textiles and cement. Its two joint ventures with Britain's Powergen PLC (P=
WG) to produce more than 1,000 MW of electricity in two Indian states haven=
't made much progress since their announcement in the mid-1990s.=20

-By Himendra Kumar; Dow Jones Newswires; 91-11-461-9426; himendra.kumar@dow=
jones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

The Enron scandal
A V Rajwade

11/26/2001
Business Standard
10
Copyright (c) Business Standard

Enron has always been recognised by other companies as best practice in ris=
k management. It put in systems to manage risks on a real-time basis and ha=
d very strong management." James Lam, founder of eRisk, a consulting firm.=
=20
As an occasional teacher and more regularly a student of the subject of man=
agement of price risks, I have been an admirer of Enron's elaborate disclos=
ure of its risk management practices. And yet, in a cascade of events over =
a period of just three weeks from mid-October, it lost two-thirds of its sh=
are value, became the subject of a US Securities Exchange Commission (SEC) =
investigation, and was taken over by a rival a third in size. (Latest repor=
ts create some doubt about whether this will go through.) What went wrong?
No, the events had nothing to do with Dabhol. Indeed, if, for us in India, =
Enron will always be associated with the controversial power project, elsew=
here it is likely become a case study for students of accounting, finance a=
nd general management. (On second thoughts, even its Indian adventures woul=
d make an excellent case study!)=20
But first, a recount of what happened. After announcing on October 16, with=
out much explanation or transparency, that it has taken a charge of $ 1.2 b=
illion against equity, Enron's share price started tumbling. Apparently, th=
e charge was the result of some financial transactions, and the SEC launche=
d an investigation. The chief financial officer (CFO), who was directly inv=
olved with the transactions, the company's treasurer and a couple of other =
senior officials were sacked.=20
Perhaps most damagingly, Enron revised its accounts from 1997 onwards, redu=
cing profits by about $ 600 million and increasing debt by a somewhat simil=
ar amount. As a result, Enron's credit rating was downgraded.=20
It seems the root problem was not in its basic business of power and gas tr=
ading, but in its investment activities controlled by the CFO. These compri=
sed private equity, and Enron's share in each of the investee companies was=
 kept artificially below 50 per cent to avoid consolidation of accounts. To=
 this end, outside investors were brought in and assured of equity in Enron=
 itself, should the value of the investee company(ies) fall below agreed th=
reshold(s).=20
All this was done to keep the losses in investments off-balance sheet, and =
mitigate their impact on reported profits. Many other US corporations inclu=
ding J P Morgan Chase, which had large private equity investments, have suf=
fered on this score (see World Money October 15). Enron wanted to avoid thi=
s and, last year, paid its since-dismissed CFO $ 30 million for his creativ=
e accounting genius.=20
Incidentally, those enamoured of US GAAP and its alleged superiority over t=
he rest of the world should note that all these gimmicks were blessed by th=
e company's auditors one of the Big Five firms, which was paid $ 25 million=
 as audit fees and $ 27 million for other services by Enron last year.=20
The restatement of the accounts from 1997 onwards became necessary as the E=
nron management/board and the auditors were forced, on review, to admit tha=
t at least some of the transactions should have been on, rather than off, b=
alance sheet. Details of all the transactions in question are yet to come o=
ut, but what has come out is bad enough.=20
But this apart, a billion dollar hit for a company of the size ($ 300 billi=
on) or cash flow ($ 3 billion) of Enron is, by itself, hardly a death warra=
nt. But it turned out to be just that for Enron.=20
Perhaps because it was too arrogant? Perhaps also because its accounts lack=
ed transparency and their opaqueness ensured that investors' confidence was=
 always somewhat fragile?=20
But there are two other points worth noting: the professionalism of equity =
analysts and whether the event restores somewhat the balance between tradin=
g and producing. As for the first, the professional analysts were surely aw=
are of the opaqueness of the accounts,but few questioned the management agg=
ressively on the subject. Perhaps the stock was too glamorous and typified =
the spirit of the times trading assets was what the "masters of the univers=
e" did, not the boring old business of producing oil or power or cars. The =
Enron management itself was proud of the way it operated in its principal a=
ctivity of trading in power and gas, with Skilling, the former CEO, claming=
 that "we are on the side of angels. We are taking on the entrenched monopo=
lies. We are bringing the benefits of choice and free markets to the world.=
" (The quotation is from an interview in BusinessWeek, prior to Skilling's =
inglorious exit from Enron a couple of weeks before the bubble burst).=20
For the analysts, there was also safety in numbers. Skilling claimed that "=
Enron's operations are built around the integration of modern financial tec=
hnologies and physical technologies", bringing derivatives theory to tradin=
g in power and gas! Obviously, the fate of Long Term Capital Management has=
 not led to more sober management of trading risks.=20
Surely the role of "markets" should be to reduce the distance, and cost, be=
tween producer and consumer? One does feel that there is something perverse=
 in a society that values, in terms of compensation, the trader (don't forg=
et this is just a euphemism for the speculator) over the producer whether i=
n the bond, currency or power and gas markets. The markets and, indeed, gre=
ed obviously have a role to play, but surely the pendulum needs to swing a =
little bit to the left?

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09


India's Mehta Comments on Birla Group Offer to Buy Enron Stake
2001-11-26 03:42 (New York)

     Mumbai, Nov. 26 (Bloomberg) -- Jaywantiben Mehta, India's
union minister of state for power, comments on reports of Aditya
Birla Group, which owns Grasim Industry Ltd., the nation's third-
biggest cement maker, bidding for Enron's stake in Dabhol Power
Co.

     Enron wants to sell its 65 percent stake in Dabhol Power,
India's biggest foreign investment, at cost. The project is mired
in a tariff dispute over $64 million in bills that haven't been
paid by the Maharashtra State Electricity Board, its only
customer, for eight months.

     ``One more bidder will increase competition, which is
welcome.

     ``Any step in the national interest is good.

     ``Cheap energy is always in the national interest since we
want to increase electricity generation and sell it at a
reasonable price.

     ``I can't comment on the time-frame of buying out the Enron
stake until the legal wrangles are solved. Once that's cleared,
then we will try and clear the proposal quickly.''

--Gautam Chakravorthy in the Mumbai newsroom (91-22) 233-9027