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Enron: The Morticians Move in


When Houston-based energy company Dynegy Inc. (DYN) pulled out of a deal to buy troubled Enron Corp. (ENE) last Nov. 28, attorneys at the firm Weil, Gotshal & Manges knew they had to act fast. Enron's stock was plunging below a dollar, its credit rating had collapsed, and creditors suddenly had the right to call in loans and seize buildings, pipelines, and other assets the company had put up as collateral. "We were hearing rumors about unilateral actions by creditors," says Weil Gotshal partner Martin J. Bienenstock. "And we wanted to stop that."

So the law firm, which Enron retained in October, threw everything it had into the case. Dozens of lawyers worked around the clock preparing a petition for Chapter 11 protection. When they finished four days later, they immediately filed electronically with bankruptcy court--even though it was 5 a.m. on a Sunday morning. By acting so quickly, the lawyers claim they kept Enron's creditors from tearing the company apart.

They've been busy ever since. Indeed, Enron's misfortune is proving to be Weil Gotshal's blessing. By the time the bankruptcy is over, the firm could rake in as much as $30 million in fees. More than a dozen other law firms are also on the case. And the attorneys are joined by a small army of investment bankers, such as Blackstone Group, which is charging $350,000 a month, plus a $35 million bonus if the company reemerges from Chapter 11. All in all, the various hired guns managing history's largest bankruptcy will earn fees of as much as $300 million or more.

They are under a tight deadline and operating in a highly charged environment. On Jan. 9, the situation became even more electric as the Justice Dept. confirmed that it has opened a criminal investigation into the fall of Enron. That is likely to be a serious distraction for the lawyers, bankers, and accountants, but for now, they are focused almost exclusively on auctioning a majority stake in Enron's highly successful trading unit, set to be completed on Jan. 10. A quick sale is seen as critical because the unit is rapidly losing out to more stable rivals. "The idea is that this is like ripe fruit," says one attorney close to the case. "If it doesn't move quickly, it will rot."

These are boom times for the morticians of the business world. It is a diverse group that also includes accountants and turnaround specialists--management consultants, such as Jay Alix & Associates, that specialize in rescuing insolvent companies. Last year, 255 publicly traded companies filed for bankruptcy, breaking the prior record of 176 in 2000, according to BankruptcyData.com. "It's not as if I get up in the morning and say, `I want to get rich off this,"' says Luc A. Despins, a partner at Milbank, Tweed, Hadley & McCloy and lead counsel to Enron's creditors. "But all of us have tons of work right now."

Unlike prior downturns, where bankruptcies have been concentrated in troubled industries such as airlines and retail, the current wave of failures is unusually broad. It runs across a wide swath of businesses, including Pacific Gas & Electric (PCG), LTV (LTVCQ), Excite@Home (ATHM), and Fruit of the Loom (FTLAQ). Even though the debtors are more diverse than ever, the bankruptcy business is dominated by a small club. There are perhaps a dozen law firms--and even fewer investment banks--with the armies of experts a big company in trouble needs on short notice.

So far, the Enron case has attracted many of the big guns. Among law firms, Weil Gotshal has the most prominent bankruptcy practice. Milbank Tweed is the leading specialist in the representation of creditors. Other top bankruptcy shops include Wachtell, Lipton, Rosen & Katz; Skadden, Arps, Slate, Meagher & Flom; and Wilmer, Cutler & Pickering. Top partners at these firms bill $700 an hour and earn more than $2 million annually.

What do they do to earn the big bucks? They work day and night to come up with a restructuring plan that will enable a viable company to emerge from bankruptcy. Corporate boards are more than willing to pay the fees of lawyers who can stave off an all-out fire sale of assets.

Bienenstock's goal is to bring Enron out of bankruptcy as soon as a year from now. Once the trading unit auction is complete, his next major task will be selling overseas assets, including a $2.9 billion power plant in India and a power plant, electricity grid, and gas-pipeline company in Brazil. Many of the projects are losing money and are joint ventures with those governments. It is uncertain who would be interested in these assets.

Given the company's complexity and potential legal problems, most observers are betting it will take Bienenstock twice as long as he'd like to bring Enron around. That could be bad news for the company, since creditors tend to push harder for liquidation the longer bankruptcy proceedings drag on. "I'd put his chances [of a successful reorganization] at about 30%," says University of Houston Law School Dean and bankruptcy professor Nancy Rapaport. "At some point, creditors might say, `You've liquidated some, we think you should keep going."'

While Weil Gotshal has had some notable successes--including the 1990 restructuring of Federated Department Stores--it also has plenty of critics. The firm's bruising tactics have earned it the nickname "We'll Getcha and Mangle Ya" among rivals. It has also occasionally run into trouble with bankruptcy trustees. In 1992, an employee of the U.S. Trustee in Connecticut accused the firm of padding its bills in a case involving gunmaker Colt's Manufacturing Co. Weil denies it, and no penalty was imposed. In 1994, though, the firm was penalized $1 million for not reporting conflicts in the bankruptcy of Leslie Fay Cos. The trustee in that case was none other than U.S. District Judge Arthur J. Gonzalez--the man hearing the Enron bankruptcy. But the two sides have met on cases with no sign of ill will since.

Standing side by side with the attorneys in the Enron bankruptcy are the investment bankers. While not nearly so numerous as the lawyers, they tend to make more money. Indeed, restructuring work is fetching larger fees than ever because of the difficulty of valuing and selling bankrupt assets. Since many bigger investment banks dropped out of the bankruptcy business when the economy picked up in the early 1990s, it is now dominated by boutiques such as Blackstone, Lazard, and CIBC World Markets.

The auction of Enron's trading unit has been largely handled by Blackstone. Boutique shop Batchelder & Partners Inc., meanwhile, has poured over the books in search of overlooked assets. Because of the pressure to move quickly, it has been grueling. "We've been heavily involved on a full-time basis, which includes weekends," says Steven M. Zelin, a senior managing director at Blackstone. For Enron's undertakers, that's likely to continue for some time. By Dan Carney in Washington, with Emily Thornton in New York and bureau reports


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