Adelphia Communications: A Case Study Jim Mahar Carol

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Adelphia CommunicationsA Case Study

• Jim Mahar
• Carol Fischer
• St. Bonaventure University

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The Rise of Adelphia

• 1952 John Rigas borrowed money to open a movie
  theatre in Coudersport, PA
• Film salesperson urged him to get into the ground
  floor of the cable industry
• Rigas purchased his first cable franchise for
  300
• 1972 Adelphia (from the Greek word for Brothers)
  was incorporated

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The Rise of Adelphia

• Key Growth Strategies
• Geographically dense operations
• Emphasis on customer service
• Focus on suburbs (as opposed to metropolitan
  areas)
• Aggressive acquistions
• 1986 IPO shares widely held traded on NASDAQ
• 1999 stock traded as high as 87 per share

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Expansion into New Markets

• By 1999, Adelphia was 6th largest cable company
  in US had expanded into
• Telephony business (Adelphia Business Solutions)
• Sports radio station
• Sports cable television channel
• Many other smaller subsidiaries

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A Family-Run Firm

• John Rigas, CEO Chairman of the Board
• Son Tim Rigas, CFO
• Son Michael Rigas, VP of Operations
• Son James Rigas, VP of Strategic Planning
• Son-in-law Peter Venetis, Board of Directors
• Family owned 77 of voting rights

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A Family with strong ties to the Community

• Company headquartered in Coudersport, PA
• 1990 Population 2,854
• Donated cable internet connections to local
  schools
• Sponsored youth sports, cultural events
• Family purchased Buffalo Sabres Hockey Team
• Personal donations to needy neighbors

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Adelphias Financial Structure

• High fixed costs
• Highly leveraged
• Public financing at corporate level
• Private debt placements at subsidiary level
• Some public debt at subsidiary level, related to
  acquisitions
• Parent company held control, while subsidiaries
  were responsible for about 2/3 of the firms debt
• Parent company largely protected in event of
  bankruptcy of individual subsidiary

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Hard Times for the Cable Industry

• In late 1990s, cable industry began to falter, as
  it was hard hit by
• Technology slowdown
• Slowing economy
• Increased competition
• Over-capacity problems

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Hard Times for Adelphia
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The 3/27/02 Analysts MeetingA Critical Event

• Oren Cohen, Merrill Lynch, questioned how the
  Rigases could afford to buy stock worth over 1
  billion since they were collectively making less
  than 2.5 million at Adelphia
• They must be borrowing, but from whom?
• Now that stock prices had fallen so much, how
  could they repay the loans?
• Stock price fell from 22 to 16.70

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The Fall of Adelphia

• Within days, Adelphia announced it had an
  additional 2 billion of debt (later amended to
  over 3 billion owed by Rigases their
  companies)
• SEC announced it was investigating
• Investigators uncovered shoddy accounting
  practices, numerous instances of self-dealing,
  fraud, including comingling of corporate family
  funds

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Chronology of Events

• 4/1/02 Adelphia delays filing annual report
• 4/2/02 Shareholder lawsuits filed
• 5/8/02 Adelphia solicits bids for cable systems
  in LA and the Southeast US
• 5/15/02 John Rigas resigns as Pres CEO NASDAQ
  stops trading in Adelphia stock
• 5/16/02 Tim Rigas resigns from CFO
• 5/23/02 John, Tim, Michael James Rigas resign
  from Board of Directors

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Chronology of Events

• 5/24/02 Adelphia discloses details of Rigas
  familys use of company assets for personal use
• 6/3/02 Adelphias stock is delisted
• 6/9/02 Adelphia dismisses Deloitte Touche
• 6/11/02 Peter Venetis (Rigass son-in-law)
  resigns from Board
• 6/14/02 Adelphia hires PriceWaterhouseCoopers
  terminates employees whose primary function was
  to provide service to members of the Rigas family

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Chronology of Events

• 6/17/02 Adelphia misses 96 million in interest
  dividend payments
• 6/21/02 Adelphia arranges financing for
  reorganization
• 6/25/02 Adelphia files for bankruptcy
• 7/24/02 The Arrests

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Postscript

• 11/6/02 Adelphia sues Deloitte Touche for
  professional negligence, breach of contract,
  fraud other wrongful conduct.
• 11/14/02 James Brown, former VP of Finance,
  pleads guilty to fraud