UBS snags Enron's online assets

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January 21, 2002 (Computerworld) -- As scandal continued to surround Enron Corp. last week, UBS Warburg quietly snatched up the IT infrastructure of the energy giant's online gas and power trading operation, for no money down.
The deal, approved by the U.S. Bankruptcy Court in New York on Jan. 18, could turn out to be a coup for UBS, since many experts considered the trading operations to be the keystone in Enron's one-time position as the seventh-largest company in the U.S. But UBS, which will assume none of Enron's past, current or future liabilities or trading positions, faces challenges in its bid to return EnronOnline to glory, including persuading energy traders to bring their business back to the online exchange.
UBS plans to hire many of the 800 people now employed in Enron's trading operation and is eyeing IT staff in particular, said UBS spokesman David Walker.
"Traders are very important, but equally so are the tech personnel who will be needed to keep the systems running," Walker added.
UBS Warburg will assume control of Enron's online trading operations, including the trading facility's vast IT infrastructure.
According to Walker, the investment bank is looking to re-establish the Enron gas and electric trading business using what it believes to be the gold standard for IT infrastructures in the world of online exchanges.
EnronOnline is no small operation. The deal involves thousands of Compaq Computer Corp. PCs, Sun Microsystems Inc. Unix farms and third-party software licenses from Microsoft Corp., Oracle Corp. and Tibco Software Inc., among others. UBS Warburg, the investment banking arm of Swiss bank UBS AG, will license the proprietary software developed by Enron for the trading operation and receive the source and object codes for that software.
A Nice Deal
UBS Warburg will also gain rights to the patents Enron has filed relating to the functionality that allows a single user to buy and sell with multiple counterparts, as well as its automated trading capabilities.
Not a bad bet, considering that the move will cost UBS little. It will pay for the operation, the licenses to use Enron's proprietary software and the office space to house the facilities out of its profits for the next decade. In return, Enron will net 33% of the profits generated by the new trading entity for the first year, with that figure dropping to 22% and then 11% in coming years.
But UBS must woo back shaken traders who have fled to rival exchanges in recent weeks - and that's no easy sell. "Infrastructure's only as good as what you do with it, and nobody's using Enron these days," said Rob Schaffer, an analyst at Meta Group Inc. in Stamford, Conn.
He added that taking over this type of operation was a "staggering" IT job - one that Enron itself probably could no longer afford. "You've got ongoing software licenses, maintenance contracts and the cost to house all these systems," he said. "It costs money just sitting there.
The contract contains a provision for UBS to deduct up to $20 million from its royalty payments to cover the costs of building additional infrastructure, paying fees for transferring third-party software licenses and establishing a disaster recovery facility.
This year, UBS will use Enron's data center in Ardmore, Texas, rent-free. After that, it has the option of leasing the facility or using another.
As part of the yearlong transition, Enron will assist with data networks, active directories, domain management, e-mail, voice mail and on-call support, though UBS will take steps to separate the trading operation and maintain information security.
UBS Warburg will also assume the EnronOnline domain name.
James Walker, an analyst at Forrester Research Inc. in Cambridge, Mass., said he believes that all of Enron's technology is likely to end up on eBay unless UBS pays to keep the intellectual capital of Enron's employee base in order to make the operation succeed.
"You're a star performer, and you knew you were working for the best team," he said. "Are you still working for the best team? At this point, those people are critical."
To move ahead with the deal, UBS Warburg must first get antitrust clearance and permission to operate from the Federal Energy Regulatory Commission before it can restart the exchange, a process that could take up to a month, though there's no firm timetable, said Walker.
Despite UBS's solid financial reputation, it will likely face skepticism in the energy trading market, said Gale Daikoku, an analyst for Stamford, Conn.-based Gartner Inc.'s GartnerG2 service. One upside is that Enron is considered the most established company in the business, and the competitors for the new entity still find themselves in start-up mode, she noted.
Meta's Schaffer questioned whether online trading will prove much of a business for anyone, but he praised UBS Warburg for its move.
"From UBS's standpoint, you're on the edge of this catastrophe," he said. "Why not step in and take the IT resources? No one's looking at IT in something like this, and it isn't costing them a penny."

Related stories:

• Enron bankruptcy case highlights e-mail's lasting trail, Jan. 21, 2002


• Laid-off Enron IT workers join Houston's jobless, Dec. 17, 2001


• Rivals thrive as Enron collapses, Dec. 10, 2001

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