The $3.5 Billion Enron Freakout

It’s hard to put a dollar value on one executive’s contribution to a company. Nevertheless, it’s long been a pastime of certain market-watchers to play the (admittedly macabre) “hit by a bus” game and speculate about how much a given company’s share price would fall if its top executive were suddenly removed from the picture.

Jeffrey Skilling was not hit by a bus. But yesterday the CEO of Enron surprised the markets, and everyone else, by announcing his resignation. The markets rarely like this sort of surprise, but even so the reaction ought to make Skilling feel pretty good about himself: At the open, Enron was trading at about $37 a share, making the company worth $3.5 billion less than it had been at yesterday’s close. Would your company be worth $3.5 billion less if you resigned tomorrow?

Anyway, the question in the case of Enron is whether Skilling’s departure, however unexpected, is really a big enough deal to cause the general freakout that’s knocked more than 10 percent off the value of its shares. It seems true enough that Skilling played an important role in Enron’s reinvention of itself as an energy-trading firm. Then again, the guy who will take over for Skilling is Kenneth Lay, who was CEO for 15 years before handing the reins to Skilling less than a year ago. Lay has agreed to stay until 2005.

The alternate theory is that the market doesn’t really care that much about Skilling, but rather believes that his departure is symptomatic of some deeper problem. As it happens, Enron shares even before the announcement were drastically below their 52-week high of about $90. Skilling insisted he was leaving only for “personal reasons,” which of course always sounds fishy. The New York Times says that Skilling has sold at least $33 million worth of Enron stock over the past year or so, though he still holds more than a million shares. He will apparently receive no severance for his voluntary departure.

Either way, the market has spoken, and in response at least one Wall Street analyst so far has downgraded Enron, citing “uncertainty” raised by the departure. This isn’t surprising, but it’s also hard to believe that either the downgrade or the degree of the market’s reaction makes logical sense. We’ve heard nothing about any drastic change in Enron as an institution, or its actual prospects, in the past 24 hours. Other analysts are saying that the change at the top won’t have a material effect on the company (which of course means they ought to be upgrading the stock, since it’s now 10 percent cheaper, but that almost never happens). And even if the company is in trouble, then surely Lay (not exactly an unknown quantity) can handle things as well as Skilling could have. For that matter, if Enron has gotten into trouble over the course of Skilling’s brief tenure—and who knows, maybe in the days ahead we’ll learn that Skilling was maneuvered out the door for some reason—then why shouldn’t traders be more optimistic about its future now that he’s gone?

One cheer, by the way, to the analyst for UBS Warburg, who told Reuters that it was too late to downgrade Enron. It’s actually routine for analysts to downgrade when it’s too late, after bad news has already pummeled a stock. Hearing an analyst admit that this is a pointless maneuver that helps no one might actually be a bigger surprise than Skilling’s exit.