NOTES ON ENRON

1. NOTES ON ENRON Death of a Corporation Idiots v. Crooks

2. FIRST: • Let’s Discuss BUSINESS ORGANIZATION. • NOTE: This isn’t in the book – but it is a sample of Microeconomics and current events – since ENRON is still in the news. • You will work for one type of organization in your future.

3. The Three Types of Business Organization • Sole Proprietorship • Partnerships • Corporations

4. Sole Proprietorship • If you alone own and control the service.

5. Opportunity Benefits of Sole Proprietorships • Owner has direct control • Small initial investment • Owner receives all profits • Owner can dissolve business when necessary.

6. Opportunity Costs of Sole Proprietorships • All losses are borne by owner • Difficulty in raising financial capital • Limited growth potential • Only one person in authority • Lack of longevity • Unlimited liability

7. Partnerships • A business owned and controlled by two or more people. • Ben and Jerry were college buddies that found after certain “experiences” at Berkeley in the 60s – they were really hungry for ice cream.

8. REMEMBER! • Partnerships don’t have to be just two people. • JC Penney: The man with a thousand partners. • Ben and Jerry today at a “Legalize Hemp” Festival • Essay contest and now their company is part of Borden.

9. Two forms of partnerships • General Partnerships: Equal decision making. • Limited Partnerships: Partners join as investors, offering capital, but little, if any, role in decision making. • VENTURE CAPITALISTS • Famous Dave made great barbecue – but had no sense of business. • Going broke UNTIL

10. Willy Theisen • Founded Godfather’s Pizza in 1973 and made a fortune – sold out the chain to Pillsbury and now is a Venture Capitalist creating partnerships like Famous Dave

11. Advantages of Partnerships • Two or more individuals own the business. • Specialization • Losses are shared by partners. • More money is available to invest in business • Sharing management responsibilities • Taxes are shared by partners

12. Disadvantages of Partnerships • Division of authority • Unlimited liability. • Difficulty in raising additional capital. • Lack of longevity. • Legal complications when there is a change in ownership.

13. Advantages of Corporations Limited liability. Easy to raise needed capital. Business owned by a group of individuals. Responsibilities for running the business divided among many individuals Easy change in ownership and business continues as long as it makes profits. – LONGEVITY.

14. Disadvantages of Corporations • Corporate charters are $$$ • Federal and state govts. monitor corporations more. • ***Slow process of decision making.

15. Corporations • Legally distinct from their owners and treated as if individuals. • Corporations can • Own property • Hire workers • Make contracts • Pay taxes • Sue and be sued • Make and sell products.

16. What kind of companies are organized as corporations? • USUALLY – food, steel, oil companies are corporations. • Insurance companies, supermarket chains, major companies.

17. Forming a corporation • When expansion calls for more than adding more partners. • GET A LAWYER!

18. Forming a corporation: • Lawyer applies for a state license: ARTICLES OF INCORPORATION. • Reviewed by state officials. If all in order they grant • CORPORATE CHARTERS

19. Corporate Structure • The corporate charter identifies the officers. • Chairman of the board – symbolic head of the corporation. • CEO – Chief Executive Officer – the REAL power. • Martha Stewart – before prison was BOTH Chairman and CEO of her corporation.

20. Corporate Structure • Board of Directors – people from inside or outside the company. • Key decision making body. • Decide on product lines. • Hires / fires corporate officers to do the day-to-day running of the corporation. • Sees that boards policies are carried out.

21. Corporate Finances • Most common way to raise money is selling STOCK. • STOCK – represents ownership of the firm. • Ownership is issued in portions called SHARES.

22. Corporate finances • If you buy 100 shares of stock in a company, you own 100 pieces of that company. If that company has a total of 10,000 shares available – you own 1% of the company.

23. Why own stock? • DIVIDENDS – profits on your investment. • PREFERRED STOCK – guarantees dividends. • COMMON STOCK – potential for dividends.

24. Why own stock? • SOMETIMES can make more money for you. • The “fun” of being involved with a corporation or a product.

25. Benefits for stockholders • Flexibility of ownership. • Limited liability. • Can’t be sued for corporate problems. • If the corporation folds, you only lose what you invested. • Private assets can’t be seized. • Coors shareholders can’t be sued by a MAD mother.

26. The trade-off • Common stock ownership allows a “voice” on how the company is run. • Preferred stock does not. • ATT, DISNEY have had their CEOs replaced by the majority shareholders voting.

27. IMPORTANT ADVICE TO FUTURE CORPORATE HEADS!!! • ALWAYS hold or directly control 51% of your company’s stock. • OR have a lack of control at annual shareholder meetings. • You can lose your job! • As Steve Jobs found out!

28. The corporation raises money • If there are thousands of shareholders, there is enormous amounts of money through the sale of stock. • eBay has 6,643,058 shares available.

29. Other ways corporations raise $$. • Corporate bonds. • You loan your money to the company. • You DO NOT own the company. • Repaid the principal and the interest. • Principal – the actual money borrowed. • Interest – the price you gave to that principal.

30. Example of Corporate Bonds • You hold a 1 year $1,000 bond. • At the end of the year you are paid back the $1,000 principal AND the 5% ($50) interest.

31. Corporate Combinations • Most corporations seek to expand. • Build new facilities • Legally combines with another enterprise. • MERGERS!

32. Three types of Mergers (corporate combinations) • Horizontal • Vertical • Conglomerate

33. Horizontal Combination • Buying up companies involved in the same industry. • THINK STANDARD OIL – John D. Rockefeller. • IF on any future test there is a Standard Oil question – just skip to the horizontal answer.

34. Horizontal combinations • All the companies merging do the same thing. • Standard Oil: all the companies Rockefeller bought, processed oil into gas. • Enron started as a horizontal combination.

35. Vertical Combination • A merger between two or more companies involved in different production phases of the same good or service. • THINK US STEEL / Andrew Carnegie.

36. Conglomerates • Merger of companies producing unrelated products. • Subsidiaries. • Started in the 1960s. • Kind of started by Warren Buffet

37. BERKSHIRE HATHAWAYINC. Acme Brick Company Johns Manville Ben Bridge Jeweler Jordan's Furniture Benjamin Moore & Co. Justin Brands Berkshire Hathaway Group Larson-Juhl Berkshire Hathaway Homestates Companies McLane Company Borsheim's Fine Jewelry MidAmerican Energy Holdings Company Buffalo NEWS, Buffalo NY MiTek Inc.

38. Borsheim's Fine Jewelry MidAmerican Energy Holdings Company Buffalo NEWS, Buffalo NY MiTek Inc. Central States Indemnity Company National Indemnity Company Clayton Homes Nebraska Furniture Mart CORT Business Services NetJets® CTB Inc. The Pampered Chef® Fechheimer Brothers Company Precision Steel Warehouse, Inc. FlightSafety RC Willey Home Furnishings Fruit of the Loom® Scott Fetzer Companies Garan Incorporated See's Candies GEICO Direct Auto Insurance Shaw Industries General Re Star Furniture Helzberg Diamonds United States Liability Insurance Group H.H. Brown Shoe Group Wesco Financial Corporation International Dairy Queen, Inc. XTRA Corporation

39. And .. • GEICO! • There is a lot more – but I don’t have room!

40. Opportunity Benefits of Combinations • Efficiency – centralized decision making. • Potential lower costs. • Easier to acquire financial capital.

41. Opportunity Costs of Combinations • Can lead to unemployment (don’t need to double the jobs) • Reduced competition in the market place. • MONOPOLIES.

42. Franchises • One company agrees – for a fee – to let another person or group set up a FRANCHISE. • Have to uphold the reputation of the parent company. • Get training and advertising.

43. Cooperatives • Co-ops – businesses owned by their members. • Membership gives privileges.

44. Cooperatives

45. Nonprofit Organizations • Does not focus on financial gain and profits. • Business organization but pursues other goals. • Income isn’t taxed.

46. So What About ENRON?

47. Enron History Created in 1985 with a merger between two companies Houston Natural Gas and InterNorth in Omaha, NE. Horizontal merger between two gas pipeline companies.

48. BTW: • BAD feelings about Enron in Omaha! • Ken Lay of Enron promised to keep Omaha as a central headquarters for Enron. • Broke the promise in six months and moved everything to Houston.

49. Enron History • Branched out of the natural gas business into power plants, pipelines for gas and energy. • Ken Lay CEO and later Chairman • Jeff Skilling came in and took the company into conglomerate enterprises.

50. Enron • By 2000, Enron was the SEVENTH largest corporation in the country and a darling of Wall Street with great earnings report. • They sell energy – so how could they go wrong? • A needed good!