In a development that drips with irony on the heels of last week’s jury verdict in the Lay-Skilling trial, Houston-based Kinder Morgan, Inc. announced that its management team — led by Kinder Morgan CEO and former Enron chief operating officer, Richard D. Kinder — is proposing to take the oil-and-gas pipeline powerhouse private in a $13.5 billion deal that would be the largest management-led, leveraged buyout in American business history.
Any further question that the public company model is looking less attractive to private ownership as a means to building owner wealth in the post-Enron era?
Chalk up a good portion of that development as another cost (among the many others, as Larry Ribstein notes) of demonizing Lay and Skilling, as well as everything having to do with Enron. Remind me again — the purported purpose of these prosecutions was to protect investors in public markets?
At any rate, Kinder and other KM executives are planning on contributing $2.8 billion of their existing shares to the newly private company, and private-equity investors Goldman Sachs Capital Partners, American International Group Inc. and the Carlyle Group would contribute another $4.5 billion.
The new private company would take on a total of $14.5 billion in debt, which means that the transaction has a total value of around $22 billion. Kinder and other KM executives are offering $100 a share for the company, which is about an 18% premium on Friday’s New York Stock Exchange closing price of $84.41. The 52-week high for KM shares is $103.75.
The irony of the deal is that KM is largely the result of a combination of Kinder’s talent and Ken Lay’s choice.
Back in 1996, Lay and the Enron board were attempting to choose between Kinder and Jeff Skilling to replace Lay as chief executive in running Enron’s day-to-day operations.
Lay chose Skilling, so Kinder left and began KM with about $40 million in primarily pipeline assets that he bought from Enron as a part of his severance deal.
Under Skilling, Enron embraced a business model based primarily on what became a huge trading operation, while Kinder built a formidable portfolio of stodgier, but increasingly valuable, oil and gas pipeline assets at KM.
KM has been fabulously successful. Since 1999, KM’s share price has increased over 150% through an aggressive expansion of the company’s business in both the U.S. and Canada and the company currently transports more than two million barrels of gasoline a day through 43,000 miles of pipelines, manages over 80 million tons of coal each year, owns huge terminals for distributing oil and gas and oil-sands assets in Alberta, Canada and stores about 75 million barrels of oil and chemicals.
As a result, Kinder has become one of Houston’s wealthiest business executives — his 18% stake in KM is worth around $2.4 billion based on Friday’s closing KM share price.
Thus, KM’s success provides one of the most interesting “what if’s” of the Enron saga.
What if Lay and the Enron Board had chosen Kinder over Skilling and spun off Enron’s trading operation to Skilling in a similar manner to the way in which Enron provided Kinder with the base assets he used in starting KM?
My sense is that Kinder would have steered Enron to success as a KM-type pipeline company, albeit probably not as successful as KM, which was never hindered by Enron’s less-successful business ventures.
Meanwhile, I believe Skilling would have enjoyed the same type of success in building a spin-off trading company that Kinder has enjoyed in building KM.
Indeed, with the benefit of 20-20 hindsight, Skilling seems like the type of fellow who would have been much more fulfilled in building an Enron spin-off into a trading powerhouse than he was in dealing with many of Enron’s far-flung business operations that he neither created nor thought were particularly important to Enron’s success.
Amidst the current demonization of Lay and Skilling, most folks largely overlook the fact that Lay probably would not have been indicted at all if he had declined the Enron Board’s request that he replace Skilling as Enron CEO when Skilling resigned unexpectedly in August, 2001.
What is ignored even more is that the entire Enron saga would almost certainly not have occurred at all had Lay’s choice for Enron CEO been Kinder ten years ago.
Love how you mix law and baseball, two forces for order in an otherwise chaotic universe. But I take some issue with your remark, “Remind me again — the purported purpose of these prosecutions was to protect investors in public markets?”
No. The purpose of all prosecutions is to restore the order of the commonwealth. That is why we have law instead of a series of private revenge acts sanctioned by the tribal elders a la Afghanistan.
The outraged majesty of the law, in the 19th century British phrase, cannot be satisfied by anything less than justice. Justice in Lay/Skilling meant — not “demonization of businesssmen” or “criminalization of agency costs” as your more mythologically-bent commentators insist — but punishment of those guilty of betraying public trust.
Even if no market-impact reforms had come out of Enron, and Sarbanes-Oxley is a good step toward corporate transparency, the prosecution of Lay/Skilling was necessary. Left unchecked, the corporate excesses of the 1990s (Tyco, WorldCom, HealthSouth) posed a moral risk to all legitimate business, as well as to the foundation of trust among humans without which civilization is a chimera.
At the end, the jury thought there were just too many shenanigans going on for a business on the up-and-up. You argue that Enron was a known speculative play and if you lost, you lost. The jury found that Lay/Skilling manipulated that play in ways the law does not permit.
That guilty finding is reassuring to those of us who do not believe corporate executive suites to be automatically more moral and responsible than any other aggregate of humans. You seem to fear a world in which corporate crime, like driving violations, can be found on every streetcorner and prosecuted whenever the police feel like it.
I don’t fear it, partially because I am personally more at risk for driving than for corporate behavior. But I do come out thinking, “If possibly selective prosecution on putatively flimsy grounds is good enough to keep 1 out of every 142 Americans in jail, why should tycoons expect better odds than the rest of us?”
“dripping with irony”? I would think so too, and to top it off they are being represented by Weil Gotshal, Enron’s former bankruptcy attorneys.
But KMP and KMR will remain public companies, and I would suspect that Kinder will remain at the helm of both, so this going private maneuver can’t be interpreted as a response to SarBox or overzealous prosecution of corporate executives. Even though it is entertaining to think it may be.