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Enterprise Hardware Firms Won't Be Hurt by Enron

With Enron teetering on the brink of filing the largest bankruptcy case in the nation's history, analysts such as Goldman Sachs' Laura Conigliaro are taking a long, hard look at what repercussions the corporate failure would have. And at least for the area of her expertise (enterprise hardware), the impact will be minimal.

Apart from IBM, hardware vendors to storage solution providers are relatively shielded from any major exposure, Conigliaro stated in a research report issued Friday. "It does not appear that Enron will cause any major ripples throughout our sector," the analyst said.

Last year, IBM formed a joint venture with Enron called NewPower Holdings that targeted the residential and small commercial markets for electricity and natural gas -- markets that were, at the time, undergoing massive overhaul through deregulation. In return for an investment by IBM, NewPower entered into a ten-year revenue management and customer care agreement with IBM Global Services. IBM also developed and hosted its website for online commerce and billing applications.

As an entity separate from Enron, NewPower is fully up-to-date with the liabilities (bills) made payable to IBM. However, IBM will still have to take a charge to reflect the now diminished value of its investment, Conigliaro said. The impairment charge will range from "roughly mid single-digit to low double-digit millions of dollars" but is most likely too insignificant to break out separately from IBM's reported results.

"In sum, the issue...should have no effect on our forward estimates or on our opinion of IBM," the analyst wrote.

An IBM official confirmed the charge will have no material effect on IBM's results.

Meanwhile, storage companies such as Brocade and EMC are likely to be even more fortunate than IBM in terms of their exposure to Enron. The vast amount of deals struck by the electricity giant made Enron into one of the best leads-generators for storage solutions providers. However, neither Brocade nor Network Appliance presently have any real exposure to the company. EMC has yet to comment.

As for hardware vendors, their exposure is minimal. Given the size of HP, IBM and Sun Microsystems as well as the breadth of their customer bases, it is not surprising that all three counted Enron as a customer, Conigliaro said.

"Interestingly though, the three currently appear to have low outstanding balance exposure to Enron, with our opinion being that exposure to Enron for each is most likely south of $10 million," she said.