Deals from Hell

13

December 2001: Dynegy’s Proposed Merger with Enron

On December 2, 2001, Enron Corporation filed for bankruptcy in what was the largest industrial filing to date.¹ The collapse capped a year that had seen the death spiral of one of the darlings of the business press. And the filing concluded a frenetic month of merger negotiations with Enron’s closest competitor, Dynegy Incorporated. The failure of merger negotiations sealed the evaporation of $70 billion in market value for Enron’s shareholders, the partial liquidation of the firm, layoff of 60,000 employees, and an explosion of civil and criminal litigation.

A counterpoint to the story of Dynegy/Enron is the acquisition of General Cinema Corporation by AMC Entertainment, its close competitor in 2002. AMC/General Cinema is strikingly similar to Dynegy/Enron in several respects: Both industries were in sharp contraction at the time of negotiations; both targets were in deep financial distress; both buyers were healthier but also had weathered the industry storm with difficulty.Yet in AMC’s case, the merger was successfully concluded and Newco emerged from the transaction much stronger. The comparison of these two cases highlights the vital roles of leadership, market instability, credibility of managers, and underlying asset quality in determining whether a merger of companies in distress will result in a deal from hell.

THE MERGING FIRMS: ENRON AND DYNEGY

Enron was formed from the 1985 merger of two gas-pipeline firms: Houston ...