Student ID : CGSSO00001201

Student Name : Yasin Hassan Yusuf

Course Code : BMNV5103

Course Name : NEW VENTURE

Program : SU-CPS

Semester : MAY SEMESTER 2012
Assignment :
Facilitator : Prof. Ali Yassin Sheikh

Date due : Aug 31, 2013

Submission
Date:
Aug 31, 2013







USING CASE STUDY TO CRITICALLY DISCUSS
CAUSES OF FAILURE OF THREE US SELECTED
COMPANIES

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TABLE OF CONTENTS
ABSTRACT .................................................................................................................................................. 1
1. INTRODUCTION ................................................................................................................................ 2
2. METHODOLOGY ............................................................................................................................... 3
3. COMPANES PROFILE ........................................................................................................................ 4
3.1. Enron Corporation ........................................................................................................................ 4
3.2. Lehman Brothers ........................................................................................................................... 5
3.3. Washington Mutual ....................................................................................................................... 6
4. FACTORS CONTRIBUTED COMPANIES TO FAIL ....................................................................... 7
5. DISCUSSION AND LESSONS LEARNED........................................................................................ 9
REFERENCES ........................................................................................................................................... 12

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ABSTRACT

The paper has discussed failure of three US companies by studying literature review. The study
finally presented lessons learned as conclusion.

It was found that Lehman Brothers, Washington Mutual and Enron Corporation all failed from
preventable reasons.

Such reasons included delinquency and lack of management supervision and control, poor
regulations from government agencies and poor product strategy.

Lessons learned from such massive failures were set forth and outlined. For example if
management practiced high moral standards and corporate code of conducts such massive failure
could have been prevented and public money could have been saved.

Government agencies as well seemed to be colluding with such corporation, because at least
there has been one case in the literature that regulators did permit Washington Mutual to
continue to lend high risk loads for over four years.

Key words: Washington Mutual, Lehman Brother, Enron Corporation, Business Failure
and Financial Crisis


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1. INTRODUCTION

The nightmare of every business is failure. Business failures, however, are part of everyday life.
In this study, three American businesses that have failed to sustain in their markets were selected
to critically discuss causes of their failure and finally provide conclusion as lessons learned.

Business failures in the twenty-first century in general and in particular the financial crisis and
recession has contributed to the increase of failure in the number of depository businesses as well
as other industries in the US (Wheelock, 2011).

This financial crisis was global reach as some studies suggested that technological integration of
global financial markets made it not only national business but a global phenomenon (Foo,
2008).

The magnificent and the massive scale of large business failure have ignited the biggest financial
crisis that was felt outside the financial sector as well as the US economy (Kassim, 2009).
For instance one study has cited that a total of 318 US banksroughly 4 percent of all active
banks in 2006 with deposits estimated to be US$436 billionroughly 6 percent of total
depositshave failed (Wheelock, 2011).

The study presented each company profile --name and address of the company, revenues per
year before collapse and the year it collapsed--, challenges that have faced those companies to
collapse; and finally conclusions and lessons learned.
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The paper particularly focused on one Commodity and Energy Company, one Financial Service
and investment Bank and one Saving Bank to better draw how financial crisis affected different
inductors in the market.
2. METHODOLOGY

The methodology involved a review of the literature and a case study on three selected American
Companies that have failed to sustain their presence in the market.

The researcher has looked exclusively at already existed literature. Secondary data such as
Academic Journals, Government Publications, News Reports and other online data was studied
and analyzed to outline and discuss causes of failure of those businesses to sustain in their
markets. Case study was also chosen to consolidate evidences across cases from variety of
sources (Appelbaum, Keller, Alvarez, & Bedard, 2011).

The purpose of these two approaches (review of the literature and case study) is to describe and
critically discuss causes of failure of those companies and finally reach a conclusion to provide
lessons learned from such business failures.



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3. COMPANIES PROFILE

In the profile, the researcher has remarked key aspects of each company such as name and the
industry of the business, sales data if available, financial debts if any; and any other piece of
information that could add value in the literature.

3.1. Enron Corporation

According to (Cnningham & Harris, 2006) & (Sims, 2003) Enron was an American leading
energy, commodity and service company. The company has begun as a merger of two Houston
gas companies in 1985. In 2000 Enron had estimated revenue of US $101 billion, and over 21,
000 employees.

Besides its interstate gas pipelines ownership, Enron also benefited from the 1980s gas pipelines
deregulation and developed gas trading derivatives (Deakin & Konzelmann, 2003).

During its lifetime, the Company ran a natural gas and electricity transmission business and a
retail supply arm dealing directly with energy users (Deakin & Konzelmann, 2003).

However, In December, 2001 Enron, the seventh largest U.S. corporation, collapsed and resulted
the second largest corporate bankruptcy to date in U.S. history (Petrick & Scherer, 2003).


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3.2. Lehman Brothers

In its article named Lehman Brothers: Too big to fail?, Toronto Leadership Center briefly
described as a business success that has begun buying and selling cotton in the state of Alabama
in the 1850's enjoying prominence in a small market. The brothers then shifted the business to
merchant banking. The company has enjoyed a big success in its banking venture. Since its
inception as a bank until 1969 the company was strict family enterprise. During that year when
the last family member left the company, the company sought a merger with another Wall Street
company.

After that merger took place in the same year 1969, the company initiated Initial Public Offering
(IPO) and become Lehman Brothers Holdings, Inc. until its bankruptcy in 2008 (Ryback).

Lehman Brothers was the fourth-largest investment Bank in the United States of America with
an estimated 26, 200 employees in 2008 (BBC, 2008).

In the meantime, after a fierce struggle on December 8, 2011, the US Bankruptcy Court for the
Southern District of New York issued a memorandum decision in favor of the trustee for the
liquidation of Lehman Brothers Inc (Sosnick, Schodek, & Loo, 2012).




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3.3. Washington Mutual

According to stockmarketsreviwe.com, Yahoo Finance and Bloombergbusinessweek.com,
Washington Mutual, Inc. started as small consumer and small business banking company with
operation in the United States markets. It is a savings and loan holding company. Washington
Mutual owned two banking subsidiaries and other non-banking businesses. Washington Mutual
had four operating segments-the Retail Banking Group which operated a network of 2, 225
stores; the Card Services Group, which operates credit card lending business; the Commercial
Group, which conducts a multi-family and commercial real estate lending business in selected
markets, and the Home Loans Group, which engages in single-family residential real estate
lending, servicing and capital markets activities.

Washington Mutual according to the (United States Government Accountability Office, 2013)
report was the largest thrift institution in the US.

By 2008 fiscal year, the company had operated with over 2.5 billion and about 49,403
employees. As of September 25, 2008, Washington Mutual Bank was acquired by JPMorgan
Chase Bank (stockmarketsreviwe.com), (Finance, Yahoo), (Bloombergbusinessweek).

The US Senate Subcommittee on Investments reported that:
At the time of its failure, WaMu was the nations largest thrift and sixth largest bank,
with $300 billion in assets, $188 billion in deposits, 2,300 branches
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in 15 states, and over 43,000 employees (PERMANENT SUBCOMMITTEE ON
INVESTIGATIONS UNITED STATES SENAT, 2011).
4. FACTORS CONTRIBUTED COMPANIES TO FAIL

The study found that certain challenges had inflicted the failure of these three companies. For
instance, (United States Government Accountability Office, 2013) found that credit losses were
the most significant cause of declines in income at Washington Mutual.

One of the major challenges that Washington Mutual faced was its involvement in high risk
loans that inflicted its default (PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
UNITED STATES SENAT, 2011).

The Senate Subcommittees report on the failure of Washington Mutual continued to find that
such debt had grown from 19% to 55% during 2003 and 2006 period.

Therefore, such delinquencies and bad product planning such as involving in a high risk load
other than low risk failure combined play a major role in the collapse of Washington Mutual.

On the other hand, Lehman Brothers another big failure had similarities with Washington
Mutual. Unlike Washington Mutual however, Lehman was Investment bank that had by nature
high risk loans, Lehman Brothers had different story to be told.

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First, Lehman Brother entered the housing mortgages little late compare to other banks
bypassing warnings about the dangers associated with US housing market; and secondly, the
Company target commercial housing mortgages rather than residential housing mortgages,
because Lehman thought that its safer from mortgage default (Ryback).

The other cause of Lehman failure was the companys board of directories whose due to their
lack of experience did not able to properly oversee all portfolios and subsidiary businesses that
were under Lehman Brothers (Ryback).

However, according to (Hines, Kreuze, & Langsam, 2011) some bad decisions such as
overestimating residential mortgage-market and ignoring immanent risks and excluding some
assets from their risk analysis caused the bank to collapse.

About the causes of the third company Enron Corporation, the company firstly collapsed before
2008 financial crisis happen and had different causes of failure than the other two companies.
During its heydays, Enron become anything and everything (Cnningham & Harris, 2006). We
can simply say the company itself contained its destruction seeds, because the company had
grown too big without due diligence.

Its businesses were foreign and domestic, low-tech and high-tech, commercial and
residential, wholesale and retail, and regulated and unregulated. It is unlikely that any company
could have developed the expertise required. So, it is not surprising that weaknesses emerged
(Cnningham & Harris, 2006).
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Besides the immense size of the company, the ultimate cause that had triggered its failure was
failed investments in international ventures and other financial misappropriations such as
removing debt off the companys balance sheet (Johnson, 2003). Another main challenge that
caused Enron to collapse was a growing competition from other energy companies (Deakin &
Konzelmann, 2003).

There other collective causative factors in Enron to collapse such as the financial
misappropriation, abuse of power by the management and lack of effective internal control
measures by the board. (Petrick & Scherer, 2003).

Therefore, it is apparent that all these big three companies had failed because of several causative
factors. These factors, however, was discussed in the next section.
5. DISCUSSION AND LESSONS LEARNED

When giants such as Washington Mutual one of the biggest thrift institution in the US, Lehman
Brother the fourth-largest investment bank in America and Enron the sixth-largest corporation
in America collapses, things should be reviewed.
After a rigorous and thorough review of the literature, the study found that three major factors
have brought the giants to its knees.
The study classified those factors into two categories. About the first category, similar factors
that all three companies share were discussed. These factors include negligence of the top
management was the prime failure reason in these companies. In the literature it was cited that in
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the case of Washington Mutual it was management oversight that caused its bankruptcy.
Similarly, Lehman brothers had a shortsighted and aggressive management philosophy that was
based on uncalculated risk taking.
Likewise, Enron had developed a culture of open innovation whereby every employee is able to
produce new service or initiatives with minimum oversight from the management.

In the second category, factors were relative to particular companies. For example Washington
Mutual suffered from massive credit losses and high delinquency from its regulators
(PERMANENT SUBCOMMITTEE ON INVESTIGATIONS UNITED STATES SENAT,
2011).

Lehman Brothers suffered solely from poor management decision such as over estimating
mortgage market-demand and risk miscalculations.

Enron in its case had perhaps the most complex unique factors. Enron has grown too big without
regularly body oversight, with inexperience employee and management abuse of power as well
as financial misappropriation. Such unique factors forced the collapse of the sixth-largest
business in the US


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In conclusion, there are plenty of lessons learned from giant failures. The study listed these
lessons as following:
1. Self preparedness and due diligence. This lesson is of particularly high important. In the
literature is found that early crisis management can save the company from risk of failure
(Appelbaum, Keller, Alvarez, & Bedard, Organizational crisis: lessons from Lehman
Brothers and Paulson & Company, 2011).
2. Ethical practices. If you go back to the literature most of reasons behind the failure of
Enron and Lehman Brothers in general and particularly in Enron were ethical
misconduct.

Finally, business failures are misfortune to every businessman in particular and in the society at
large. For example when bad ethical is practice in big business such as banks and other
corporations such action could result failure of these business, which in turn will result loss of
public money in many ways such as loss of invested capital, loss of employees benefits and
pensions and government control pubic money in the form bailout bills.



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