The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (46 page)

Mark quickly hired an army of developers—a corporate staff of over 70—to seek out water deals. “How are you going to do anything without people?” she said at the time. But others had a different view of the buildup. It was “a monster hooked on to the side of Wessex,” recalls Chris Wasden, a former Azurix executive. Early on, new people were showing up almost every day. Naturally, they weren’t the standard gray-haired engineers who dominated the water industry. Mark, like Skilling, believed that talent outweighed experience, and in Enron’s world, talent meant thirty-somethings with MBAs from all the best business schools. What did it matter that they didn’t know a thing about water? They were smart; they would figure it out. “What am I going to do, hire a $50,000 water engineer from Detroit?” she’d ask.

Azurix people worked hard, and no one worked harder than Mark herself. She was always in her stilettos, always urging her employees to get deals done, and always, always, courting people. “She could talk up to ambassadors and down to rednecks,” says one former Azurix executive admiringly. But to what end? The rap on Mark when she ran Enron’s international business was that she was so intent on landing the deal—
any
deal—that she didn’t fully consider whether the deal made sense.

At Azurix, the search for deals had a more desperate quality; after all, the company
needed
to do deals. That was the story it had sold investors. But the competition was brutal and prices were sky-high; and Azurix was behind from day one. Yet Mark never lost that sense of boundless optimism, her unshakable belief that she could make the company work. “We spent millions chasing things with little likelihood of success,” says one executive, who remembers jumping on a plane and flying to Guam for a dinner meeting. Others would tear out of the office at a moment’s notice and spend three weeks investigating deals in far-flung places.

Almost immediately Azurix needed more money. Mark, with the help of Skilling, Lay, and Fastow, tried first to raise several billion dollars from private-equity firms, even approaching Chase Manhattan about helping the company find partners. But that effort went nowhere; this was the era when people put $20 million into an Internet start-up and took $200 million out six months later. Nobody wanted to tie up billions in a heavy-asset company like Azurix. So instead, Mark told the investment bankers at Merrill Lynch that she wanted to take the company public. Indeed, she
had
to take Azurix public; otherwise the company would soon be out of cash.

It was a very risky move, especially in a stock market that had zero patience. After a public offering, the brand-new company would be naked, forced to reveal itself four times a year, like every other publicly traded corporation. It would have no Enron shield to hide behind and no room for even small stumbles. Azurix had yet to complete a single deal aside from the original Wessex purchase. To some people inside Azurix, it was obvious that the company wasn’t ready to go public. “Enron took the pie out of the oven way too soon. It wasn’t cooked in the middle,” says a former Azurix employee. Amanda Martin says she even went to Jeff Skilling to tell him that Azurix wasn’t ready to go public. “I don’t care,” she says Skilling replied; Enron was determined to see Azurix fund itself.

One thing Mark never lost was her ability to sell snow to Eskimos—as she proved again during the IPO process. As she met with potential investors in advance of the IPO, Mark made extravagant projections, projections that were unprecedented in the water industry. Azurix was going to earn a 20 percent return on equity, double the industry average. With all the acquisitions she planned, operating profits, she claimed, would skyrocket, from $300 million to $800 million in 12 to 18 months. Azurix’s profit margins would far outstrip those of its older, stodgier competitors. Azurix, she said, would revolutionize the water business, just as Enron had done in natural gas and electricity.

But
how?
How was Azurix ever going to be able to grow that fast? By doing deals, that’s how! Indeed, Azurix’s prospectus listed dozens of possibilities, from Tunisia to Ecuador to Illinois. Here, though, was a problem even Mark’s vaunted salesmanship couldn’t overcome: Azurix still hadn’t done any deals, and investors were hardly going to flock to the stock until she could prove that her deal-oriented strategy would work. Its one ongoing business, Wessex, was hardly enough to inspire a big commitment from the investment community. By the time Mark and her team launched the Azurix road show—the grueling multicity tour in which the top executives and the investment bankers make presentations to rooms full of institutional investors—the situation was getting desperate. Azurix needed to compete a deal—fast.

And there was a big one out there for the getting. The political leaders of Buenos Aires province in Argentina decided to allow private water companies, including Azurix, to bid for the right to manage the water and wastewater needs in part of the province. The contract would run for 30 years. Even as Mark was busy preparing for the IPO, a team from Azurix was in Argentina, trying to gauge how much it should bid. (Mark herself didn’t have the time to visit.) In mid-May, an Azurix board meeting was called to discuss the company’s final bid. The mood was tense, with Azurix’s officials worried that they might lose out to one of the French water giants, which were also bidding for the business. The numbers were already big, but one person present remembers Ken Lay asking if Azurix could support upping the bid another $30 million. The Azurix team said yes, and no one present said no. Azurix bid $439 million.

Days later, on May 18, 1999, Azurix was notified that it had won the rights to the Buenos Aires concession. Though Azurix bid for the right to manage two regions—2.1 million people—while most competitors bid for smaller pieces, the company’s offer was more than three times higher than the next contender. “There was so much money on the table, the rest of the industry was laughing at us,” says a former Azurix executive. But the deal was done—Azurix had shown it could do what it promised—and the prospective investors were none the wiser.

Three weeks later, on June 9, Azurix went public. Mark and CFO Rod Gray each bought $1 million worth of stock to show their faith. Azurix’s shares opened at $19 per share; the sale raised just under $700 million. Once again, however, the big winner was not Azurix but Enron. Over half the shares—20.5 million—were sold by Atlantic Water Trust. Enron took $185 million of those proceeds; most of the rest of it went to pay down some of the Marlin debt. And Azurix? It wound up with $300 million. Most of that cash was quickly consumed by repaying an advance from Enron and funding the Buenos Aires deal.

Still, it seemed a triumphant moment. Over the next month, the stock rose to $23.88. Merrill Lynch earned some $25 million in fees on the deal; its analyst dutifully predicted that Azurix would achieve average annual growth of 30 percent over the next decade. As for Mark herself, the IPO made her controversial in England, where business writers pounded her for taking two million Azurix stock options.

But to most other observers, Mark seemed at the pinnacle, both personally and professionally. In July, she joined Enron’s board, rekindling the old speculation that she might be in line to run the company one day. (She told friends that she joined the board mainly to protect Azurix’s interests.) During an early September interview with Fox’s Neil Cavuto, he pointedly asked her to address the rumors that she would be Enron’s next chairman. She refused to comment but did say about Azurix, “This is a company that I think will grow exponentially over the next three to five years.” Later that fall, Mark was ranked 29th in
Fortune
’s
annual list of the 50 Most Powerful Women in Business. (The year before, she was ranked fourteenth. “Fierce and fearless,” wrote the magazine that year, “Mark is like a character in an Ayn Rand novel.”)
Fortune
also noted that she was “beginning a new five-year project: to consolidate the $300 billion global water market.” And she became engaged to a Bolivian-born businessman named Michael Jusbasche, whom she married in October. On the surface, life appeared sweet for Rebecca Mark.

 • • • 

Just weeks after the IPO, Amanda Martin walked into Mark’s office and said, “We’ve got a mess on our hands.” The mess was Buenos Aires.

It was almost immediately apparent that the Buenos Aires deal would have been horrendous at any price. The Azurix team sent to Argentina to scout out the deal missed some important details, starting with the fact that the water system’s headquarters wasn’t included in the bid. Azurix employees had to scramble to find office space and hang a shingle on a storefront so people could pay their bills. So many records were missing that Azurix could bill only 60 percent of its customers. Many water users didn’t pay at all, because they were friendly with the government, which protected them. The Azurix team hadn’t even realized that basic maintenance work had been ignored for years; Azurix engineers later estimated that the company needed to spend $350 million on infrastructure over the next five years. Wasden remembers coming to a stomach-wrenching realization: “We’re not
ever
going to make any money on this thing.” He was right: over the next six months, Buenos Aires produced just $39.5 million in revenues and a pathetic $400,000 in operating profits; in 2000, the Buenos Aires operation had an operating loss of $11.6 million.

On August 5, Azurix had to report its quarterly earnings for the first time. Mark announced that the company had hit its profit target, with $20 million in earnings for the quarter. But that figure was entirely due to Wessex, and during the ensuing conference call with analysts, she conceded that the deals were coming a little slower than she had expected.

In June, Azurix had bid on a big contract to manage Berlin’s water supply but lost out to Vivendi. Still, Azurix was attempting to put together projects in Bucharest, Tangier, and Peru, among other places, and she expressed confi-
dence that all would be well. One by one, though, each of those deals was pushed back, and the stock began to slide. What deals the company did complete were small and scattered. They included a concession in Cancún, a Canadian water-service company, and a German construction company. None was a show-
stopper and several were dogs. Within four months of the IPO, Azurix stock stood at $17 a share, two dollars below the original offering price.

It didn’t help that Azurix seemed to sink into one political pothole after another. On September 21, 1999, Mark and several members of her team met with Florida’s governor, Jeb Bush, to discuss the possibility of Azurix selling water from the Everglades in exchange for helping to fund a $7.8 billion restoration project. The project was supposed to capture storm runoff; some of it would stay in the Everglades and some of it would be sold. When Azurix’s plan was leaked to the press, it caused an uproar, with the chairman of the Florida legislature’s Everglades committee calling the idea “the most sinister business proposition the state has ever had.” The proposal went nowhere.

A few weeks later, Azurix spent $31.5 million to buy 13,600 acres in Madera County, California, from a developer who, according to Public Citizen, had paid just $8 million for the land eight years earlier. Mark wanted to use the land to build an underground water-storage bank so that Azurix could collect water in wet years and sell it in dry years. Once again, Azurix executives underestimated the politics of water. Upon learning why Azurix had bought the land, the Madera County government immediately began drafting a set of rules that would require the company to obtain elaborate approvals before it could make a move. Organizations including the Sierra Club and a local farmers group berated Azurix, with the farmers calling the plan a “crime in progress” and a “theft of our water.” That plan also stalled.

Even Wessex, Azurix’s one solid asset, was sinking. An upsurge in the value of the dollar against the British pound hurt Wessex’s reported earnings, which were calculated in dollars. In late 1999, the company was told by British regulators that it had to cut its rates by 12 percent starting in April 2000. The real killer was that like so many other older water utilities, Wessex needed to upgrade its own facilities—at a cost estimated to be upward of a billion dollars. “Within a year,” says a former Azurix official, “you could make a good case that Wessex was worth about $1 billion less than we paid.” By late October 1999, Azurix’s stock had fallen to $13 a share.

The first real day of reckoning was November 4. Just five months after the company had gone public, Mark was forced to announce that Azurix’s earnings would be dramatically lower than investors were expecting. She had wanted to make a more upbeat announcement—she was
sure
things were going to turn around—but the company’s lawyers wouldn’t let her. The tone on the resulting conference call was extremely negative. The stock promptly plunged 40 percent, to $7.75 a share.

In an effort to cut Azurix’s costs, Mark began to let go of some of her high-priced talent. But because of the guaranteed contracts she signed in the company’s heady early days, even the layoffs cost money. Though he’d worked at the company for only a short time, CFO Rod Gray’s severance called for him to receive $3.5 million over four years. Azurix’s strategist, Ed Robinson, also walked off with a $2.1 million payout when he left. Meanwhile, there were rumors that Azurix couldn’t make its payroll. During the fourth quarter, Azurix announced a restructuring and took a $34 million charge.

Inside Enron, Azurix became a whipping boy. Some of the traders called it the “chick company.” Although it had been in existence for only a year and a half, Enron executives were already writing it off. After an employee made a joke about Azurix’s performance in a December 1999 all-employee meeting, Lay said: “What happened there is, in fact, too bad. It maybe in part couldn’t have been prevented; maybe part of it could have been prevented. . . . Enron doesn’t like to be associated with any company that’s not successful. We’re sorry that Azurix has not been totally successful. . . .”