The Oregonian


An Appetite For Risk



By Jeff Manning, Jeffrey Kosseff, Ted Sickinger and

Steve Woodward



Enron thrived on risk.


So did a mass of companies, from telecom superstar Global Crossing to doughnut dominator Krispe Kreme.


So did investors, from fund managers to day traders.


So did the collective psyche of a nation confident of unbounded growth and prosperity.


But that was then. And this -- say analysts, academics and the suddenly humble -- is payback time for risk run amuck.


After half a decade of a voracious appetite for rich growth expectations and a high tolerance for sugar-coated financial accountings, nausea has set in.


"What you're seeing now is a cleansing action," said Bruce Cramer, a senior vice president and branch manager for the Portland office of Ragen MacKenzie. "It may hurt, but it's necessary. . . . If you study cycles in America, this is what happens."


By the latter half of the '90s, the stock market was on a roll. The Nasdaq's steep rise reflected a belief in dot comers and any company technologically inclined, whether profitable or not.


The euphoria fed on itself. And it encouraged activities that further beefed up stock values. Financing, recruitment and compensation became linked to market fortunes.


Meanwhile, the cautious suffered.


In a sense, said Cramer, "new economy" types turned risk assessment on its head.


"It got so they thought the most risky thing they could do was to do nothing," he said. "If they sat still, they got overtaken by someone else."


Larry Lewis, dean of the University of Portland's Robert B. Pamplin Jr. School of Business, said risk became irrelevant for those lulled by good times.


"You look back when the market was at its height and the Nasdaq was off the charts and the incredibly high price earnings ratios -- that's got to be an indication people weren't considering risk."


Companies' travails today, Lewis said, accompany the inevitable down side of the business cycle and a rediscovery of risk.


"We're seeing a shaking out of companies that were overly aggressive," he said.


Enron will go down in the history books as the company whose implosion signifies this era of unrestrained risk-taking. But it wasn't alone. Here's a look at four other companies that find themselves mired in controversy, in part because of their appetite for risk. -- Gail Kinsey Hill Capital Consultants Collapse of Portland money manager foreshadowed elements of Enron drama.


Before Enron, Portland had its own white-collar scandal – the case of investment manager Capital Consultants. The similarities between the two cases are striking.


Prominent executives accused of perpetrating complex maneuvers to defraud investors and enrich themselves in the process.


Thousands of workers lose major chunks of their retirement savings.


Lawyers and accountants suspected of aiding and abetting the executives' alleged schemes.


The Enron case has spawned public outrage and congressional inquiries regarding the handling of investment plans, the integrity of financial reports and the role of accountants and lawyers who represent businesses. All of those issues played out in the Capital Consultants saga.


Both Enron and Capital Consultants took enormous risks.


Enron flung billions of dollars at high-stakes power projects in the Third World and commodities-style trading operations for everything from electricity to advertising space. Capital Consultants loaned workers' pension money to Chilean logging operations, sub-prime lenders and financiers of furniture and used-car operations.


The two companies employed vastly different tactics allegedly to cover up deep financial problems: Enron executed elaborate deals with affiliated parties. Capital Consultants employed a simple Ponzi-scheme -- it paid its clients with their own money.


The bottom line is much the same: The companies collapsed, bringing others down with them.


Capital Consultants catered to dozens of union trust funds, meaning much of the estimated $355 million that the investment firm lost came out of the pockets of union workers and retirees. Enron and PGE workers lost more than $1 billion from their 401(k) retirement accounts alone.


A phalanx of outside professionals have become embroiled in both controversies. In each instance, lawyers, accountants and investment consultants failed to sound the alarm bell despite obvious warning signs.


Accounting giant Arthur Andersen and venerable Texas law firm Vinson & Elkins have drawn fire for their role in the Enron scam.


Arthur Andersen also is a player in the Capital Consultants case. It audited the books of the former Wilshire Credit, which threw Capital Consultants into financial crisis when it borrowed and failed to repay $160 million.


Portland's largest and seventh-largest law firms, Stoel Rives and Lane Powell Spears Lubersky, as well as Los Angeles-based O'Melveny & Myers, also were involved in the Capital Consultants case. Between them, the three law firms have agreed to pay more than $40 million to settle potential civil charges against them.


Accounting firm Moss Adams, which did work for Capital Consultants and allegedly gave its blessing to some of the investment firm's most controversial deals, has refused to settle and has been sued by dozens of former Capital Consultants investors. -- Jeff Manning


Global Crossing Company rides telecom wave before crashing into reality


When the Internet bubble burst nearly two years ago, the dot-coms that provided the ideas behind the information age quickly collapsed.


The greater downfall took longer. The companies that strung the fiber-optic cables to carry all those ideas have been dying slowly. And perhaps the most dramatic story is that of Global Crossing, which filed for Chapter 11 bankruptcy protection last month.


Bermuda-based Global Crossing was ambitious, to put it mildly. Like Enron, it was a big contributor to political campaigns. It covered the world with 100,000 miles of fiber optic cable in the past five years, hoping to compete with giants like MCI WorldCom to carry data for other telecommunications companies and Internet service providers.


At the time, few shareholders or analysts blinked. But the investments were based on assumptions about demand that in hindsight look unrealistic. The way the company recorded these expensive infrastructure investments on its books increased the risk to shareholders and creditors.


Many analysts said the aggressive early accounting was legal, but it caused debt to mount and made the company unsustainable once demand waned.


Global Crossing inked 20-year deals to sell capacity on its network. It took revenue for the entire 20 years in the first quarter of the deal, while the costs were spread throughout the 20 years.


It also expanded its network by swapping access to fiber optic lines with other telecommunications companies. Like other telecommunications companies, Global Crossing claimed the revenues from the transactions but accounted for the cost of the access as capital expenditures. That allowed it to report income immediately while spreading expenses over a period of years.


So to investors, Global Crossing looked beautiful.


The company recorded earnings of $10 million in the second quarter of 1999, when its stock peaked at $61.38 a share, up from its $19 initial public offering price less than a year before. Holders of its common stock, however, saw a loss to their shares that quarter because the company paid $14.2 million in dividends to preferred stock owners, largely institutional buyers.


Riding this wave of stock-market popularity, Global Crossing almost acquired US West Communications in 1999 to become Oregon's largest local phone company, but rival Qwest Communications International outbid it.


The dot-com bubble burst in 2000. The company succumbed to its debt this year. On Friday, Global Crossing's once high flying shares closed at 6.3 cents.


What happened?


"When you have a low-margin product like fiber-optic capacity, you need to have to have a large volume," said Goli Ameri, president of eTinium, a Portland telecommunications consulting firm.


But that demand for capacity dwindled as lenders and investors became more tight-fisted and improved technology reduced the need for fiber optic cables, said Vik Grover, a telecommunications analyst at Kaufman Bros. in New York. -- Jeffrey Kosseff


Tyco International


Enron's collapse draws attention to company's accounting, acquisitions


If any company has been afflicted with Enronitis -- or the

perception that its accounting leaves something to be desired -- it's Tyco International, a many-tentacled conglomerate whose electronics division makes printed circuit boards in Oregon.


Accusations of aggressive accounting and inadequate disclosures by Tyco have sent the company's stock spiraling from $54.38 on Jan. 7 to its close Friday at $27.90, wiping out more than $50 billion in market value.


Tyco became a stock-market darling in part by fueling growth through $60 billion in acquisitions since 1992.


The accounting question was first raised in 1999, just as Bermuda-based Tyco was finalizing its $72 million acquisition of Praegitzer Industries, a manufacturer of printed circuit boards based in Dallas, Ore.


At that time, a short-seller named David Tice suggested that Tyco was aggressively and unnecessarily writing down the assets of acquired companies before they hit Tyco's books. Lowering the value of assets helps inflate earnings in subsequent periods by reducing expenses when the company starts reporting revenues from the new operations.


The Securities and Exchange Commission launched an informal investigation into the allegations at the time, but its enforcement division ultimately dropped the inquiry with no penalty to Tyco.


The Enron debacle seems to have rekindled the same concerns, however. And they are now circulating so persistently that true or not, they have become a real business problem for Tyco.


Queasy investors have dumped Tyco's stock in the last month after it disclosed that it made a $20 million payment to a director for his help arranging an acquisition made last year. The stock also fell on reports that two top executives cashed out some $100 million in stock options with the company for tax purposes and repayment of loans.


"The payment to the director may seem a little unseemly, but there's nothing illegal about it," said Lee Allen, president of Allen Financial Advisors in Boston. "There's also nothing wrong with executives exercising their stock options."


Investors have also expressed concern that the company has failed to announce 700 acquisitions made during the past three years for $8 billion. Tyco maintains that under the SEC reporting requirements it didn't have to announce each transaction – many of them involving small companies -- individually.


Allen says short-sellers, who in essence bet that a stock price will decline, have effectively created enough concern over Tyco's accounting that vendors are becoming squeamish about doing business with the company. Also, recent downgrades to the company's debt rating have forced the company to tap more expensive bank credit lines in place of the commercial paper market.


Tyco Chief Executive Dennis Kozlowski also blames short-sellers for making "false accusations for their own benefit." But the company has pledged to provide more transparent accounting and, specifically, more information on its acquisition accounting.


None of the news has been good for Tyco's Oregon employees, who have already been battered by the stagnant computer and communications equipment market, which has undermined demand for the printed circuit board that the company makes.


In April, the company closed its plant in White City, north of Medford, where it employed 450. It also has slashed employment at its plant in Dallas from 900 to 370 and put on hold plans to build a $30 million plant in Salem, which was to employ 300. – Ted Sickinger


Hewlett-Packard Proposed deal with Compaq ignites debate over acquisition's risk


With dust still rising from the wreckage of Enron, nervous shareholders are putting other companies under the microscope. Moves considered to carry high risk, such as big acquisitions, must survive extra scrutiny.


In Oregon, skeptics are raising eyebrows over Northwest Natural Gas's proposed debt-laden purchase of Portland General Electric. Nationally, boosters and naysayers are clashing over the wisdom of printer-maker Hewlett-Packard's brash plan to acquire PC-maker Compaq Computer for more than $20 billion in stock.


The H-P deal with Compaq -- more so than other recent big deals, such as Chevron's buyout of Texaco -- has ignited a debate over risk, pitting the companies' boards of directors against the heirs of H-P's founders in an unusually personal and public battle.


H-P's top brass and all but one company director think the acquisition actually reduces risk -- by creating an $87 billion-a-year service business that no longer will be highly dependent on selling printers, as H-P is now, or on selling PCs, as Compaq is. Cost savings would amount to $2.5 billion a year by 2004, the companies estimate.


"Through this combination we're creating a broader, more balanced and diversified whole," H-P's chief financial officer, Robert Wayman, told stock analysts Sept. 4, when the companies announced the deal.


But two months after the merger proposal was announced, the heirs of H-P co-founders William Hewlett and David Packard dismissed management's arguments, contending that the merger would make the combined company too dependent on the low-end, commodity PC business and diminish the importance of the printing business. Calling the risk of failure substantial and unacceptable, the families said they would vote their 18 percent combined ownership share against the merger.


Their key question: How can H-P and Compaq succeed in integrating their complex businesses when so many big tech deals have stumbled before?


H-P and Compaq themselves acknowledge the difficulties of merging technology, operations and their 150,000 employees, including roughly 6,000 workers in Vancouver, Wash., and Corvallis.


"The failure of the combined company to meet the challenges involved in integrating the operations of H-P and Compaq successfully could seriously harm the results of operations of the combined company," the companies said in a joint prospectus sent last month to shareholders.


Walter Hewlett, William Hewlett's son and the only dissident H-P board member, has been considerably blunter.


"The odds are against success in this merger -- there is a serious risk of failure," he and his allies wrote in a Jan. 16 letter to H-P shareholders.


He pointed to the lackluster combinations of AT&T and NCR, Burroughs and Sperry (now Unisys), and Compaq and Digital Equipment -- all high-tech mergers or acquisitions that fell short of original expectations.


"The complexity of putting two companies together, in a difficult economy, when each company is currently undergoing its own transition, presents daunting challenges and unacceptable risks," Hewlett said.


The companies' shareholders will vote on the merger March 19

and 20. -- Steve Woodward

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