Botched merger in 1999 pointed to Enron problems


HOUSTON - Three years ago, a German company pieced together a picture of Enron Corp.'s finances so troubling that the discovery helped persuade the company to call off a merger with Enron, executives in Germany and the United States said.

The 1999 deal would have combined Enron and Veba, a utility company based in Duesseldorf, in a so-called merger of equals. The negotiations collapsed amid a clash of egos between the Germans and the Americans and the growing sense at Veba that Enron was going to take it over instead, executives involved in the talks recalled.

But Veba also became concerned about the levels of debt Enron had and with what a senior executive said were Enron's "aggressive accounting practices."

Consultants from PricewaterhouseCoopers told Veba that Enron, through complex accounting and deal making, had swept tens of millions of dollars in debt off its books, making the company's balance sheet look stronger than it really was, said people involved in analyzing the failed deal.

PricewaterhouseCoopers was one of several banks and consulting firms that worked on the Veba-Enron deal. The consultants drew on public sources such as trade publications and securities filings, these people said.

It could not be determined whether the talks reached the stage at which the companies exchanged confidential financial information.

It was similar questions about partnerships and other devices used by Enron to shift debt off its books that precipitated the company's financial collapse in the fall. Securities experts said the fact that a potential merger partner had such doubts years earlier suggested the problems might have been apparent if Wall Street or federal regulators had been looking more closely.

In the wake of Enron's collapse, it has become apparent that many financial firms - from Enron's lenders to Wall Street bankers who underwrote the company's partnerships to investment houses that bought into them to the accountants who reviewed their books - knew more about Enron's condition than the company publicly disclosed.

But for many reasons, that knowledge did not translate into action to put the brakes on Enron's deal making or to force the company to disclose more about its finances until the fall, when Enron was under investigation by the Securities and Exchange Commission.

As part of Veba's due diligence effort in the proposed merger - the detailed financial and legal analysis that precedes any deal - a team from PricewaterhouseCoopers worked for about two weeks, people with knowledge of the effort said, scouring trade publications and SEC filings for information about Enron's deals. They eventually pieced together a picture of a highly leveraged company far different from the glittering industry leader that the rest of the equities market saw.

Veba concluded that Enron had shifted so much debt off its balance sheet accounts that the company's total debt load amounted to 70 percent to 75 percent of its value as expressed in its debt to equity ratio, executives said.

In March 1999, debt rating agencies would probably have calculated Enron's debt level at 54.1 percent, based on the information that the company disclosed in regular reports to the SEC, said John E. Olson, a longtime critic of Enron and the head of equities research at Sanders Morris Harris, a securities firm based in Houston.

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