Adelphia Communications’ Bankruptcy

Bankruptcy
The case talks about the situation Adelphia went through after the governance problem and fraud they had that led them to bankruptcy. Adelphia being a family owned company; by April 2005 they decided to sell out the remaining assets of the company to the one of the other 3 big cable companies; Time Warner, Comcast and Cablevision; each one of them offered different amount in the bid, nevertheless the company had to analyze how certain each offers were, how probable was any of them to pull out the offers as well as what to do with the money they would get in case the judge let them do the sell.
Family Control
Adelphia was founded and managed by Rigas family, the case talks about how the company after 1985 decided to go public in order to acquire the capital investment to expand and become one of the biggest cable providers in the country. Nevertheless the Rigas family managed to keep almost full control of the company by keeping special type stocks with decision making power in the board. The company kept being managed by the funding family as well as the family keeping some of the cable assets for themselves in separate private partnerships and continuing to buy properties privately as well as for the company.
The case explains how the privately owned assets of the family were managed by already-public Adelphia Corp by some management agreements and with this the expenses of such assets were consolidated with the expenses of Adelphia by some accounting system the company had; however the profits and revenues of such assets were not consolidated. This created the first red flag.
The case shows clearly the structure of the board of directors; which was entirely created by family and friends, John (founder) being the Chairman of the board and CEO and his sons as high end executives with two family friends added to the board.
The Rigas family also involved itself in the small town where John Rigas was from and employed more than half of the population in Adelphia’s as well as offering help to most of the population by expending big money.
Rise and Fall
By 1998; the case shows how company decided to expand and enter the broadband internet service. Adelphia started to acquire and purchase different providers around the country and added $6 billion to their debt account. Adelphia was at that time the sixth larger cable provider in the country but also had one of the largest debt-to-market cap ratios in the country of 11, 9 times larger than Comcast’s and 25 times larger than Cox’s. As Adelphia grew; the Rigas family not only did not want to sell any shares, but they wanted to purchase more stock for themselves so they decided to create a “co-borrowing” arrangement where the company would lend money to the family in order to purchase shares. The family got a hold of $200 million in a loan that was supposed to be paid by the privately own assets and companies the family had and be deposited directly in the cash account of Adelphia’s. This continued and the case shows how by the end of 2001, the co-borrowing agreements reached $5.63 billion.
By March of 2002; Adelphia had to disclose the amount of capital lend to the Rigas family and also disclose that this money was used by the family to purchase large amount of stocks from the company. In result; the stock price fell 27% in just 2 days. By April 2002; the Securities and Exchange Commission launched an investigation in the co-borrowing agreements of Adelphia which caused NASDAQ to delist Adelphia’s stock. By May 2002; John, Michael, Tim and James Rigas resigned from the executive positions and their board positions. By June 2002; The Company filed for bankruptcy protection.
As the bankruptcy moved forward, a more complete picture of the scandal emerged. In addition to using the co-borrowings to but Adelphia stock, the Rigases had used the cash management system to fund a variety of personal projects, including the purchase of a hockey team, the development of a golf course, and the production of a movie by Ellen Rigas. It also turned out that many of the charitable gestures John Rigas became famous for in their hometown had in fact been financed by Adelphia’s shareholders.
In July 24th; federal authorities arrested John, Time and Michael Rigas, along with Adelphia’s vice-president James Brown. In November 14, Brown pleaded guilty to conspiracy, securities fraud and wire fraud and agreed to testify for the prosecution.
Managing Adelphia’s Bankruptcy and Bidding
The case shows how management had to be replaced and how this new management had to gro thought all the financial statements of the company in order to identify the mismanagement practices. The new management had the difficult task to bring the company up from the grave and reinstitute employee morale as well as make a deal with banks and creditors. By 2004, creditors and banks urged Adelphia to put the company’s assets for action. After the new management and a team of one hundred accountants reviewed seven million ledger entries; Adelphia released new, restated earnings that revealed billions of dollars in losses for the years 2001 and 2002. The new management team also had to manage multiple litigations and a new reorganization plan in the bankruptcy court.
By September 2004; Adelphia decided its assets into geographical zones in order to start the bidding, these areas were characterized by geographical clusters of customers and metropolitan areas. Time warner and Comcast announced that they might submit a joint bid.
Questions
1. What did the Rigas family management do wrong?
By going public the company should have kept management and ownership separated as well as discloses company expenses and usage of assets. I believe the Rigas family decided to go public in order to acquire capital expenditure but did not take the disadvantages of going public. The Rigas family took all the pros and none of the cons of making the company public. a. Were any aspects of Adelphia’s corporate governance/ownership structure under the Rigases problematic in your view?
Multiple; the company did not separate management and ownership and decided to keep the full control of the company which created nepotism over the decision making process of the company. Also the fact that the company kept separated assets that were pretty much financed by Adelphia’s revenue stream created multiple conflicts of interests between the parties involved and the shareholders.

b. Is there anything that concerns you about the Adelphia/Rigas family “co-borrowing” agreements?
Yes, there is doubt about the fact that the Rigas family decided to use the company as a “piggy-bank” since they were unable to take personal loans due to lack of collateral; also added to that the Rigas family decided to purchase stocks from the company with that money that was borrowed; this is inside trading. 2. If one ignores any Alleged Frauds by the Rigases, how viable was Adelpahia’s business prior to the bankruptcy filing?
It was condemned to fail; even if the Rigas family did not commit any fraud, the business strategy of the company was condemned to fail; the aggressive purchasing of small companies for over-the-limit price and aggressive borrowing was going to bring the company down. Also the lack of organizational management to control expenses and the lack of accounts and balances from management and ownership created a conflict that was not going to be good in the long term in case the company kept growing at the same pace. 3. General questions on bankruptcy exit mode: what are the options for emerging from bankruptcy?
Reorganization and Auctioning of Assets c. What are the pros and cons of these different ways of existing bankruptcy?
Reorganization has the advantages that will give the company and its new management to keep most of the customers and create a new organizational change and strategy to focus in the service of current customers as well as getting a hold of revenue to pay debt and fix the harm done. Disadvatage is the accumulation of debt, expense of reorganization and the hardship of implementing an organizational change as well as the pressure to succeed.
Auctioning of assets in the other hand has the advantage of a quick exit for the problematics of the company as well as the chance to receive a bid that surpasses the actual value of the company, the company will get a hold of cash to pay creditors as well as decreases the responsibility beheld over new management and direction. Some of the disadvantages is that the process takes time and money and the amount of money received by buyer might not meet the expectations of ownership. 4. Under pressure from Adelphia;s unsecured creditors; new management decided to put the company up for sale rather than pursue traditional stand-alone Chapter 11 reorganization plan. Are there reasons why management should reconsider this decision, and in general, what considerations do you think are relevant in choosing between the two approaches to resolving the financial distress?
In my opinion they took the best way out, Adelphia’s previous management had a much embedded culture on its current employees to the point that reorganization would have been too difficult to come through. Organizational change requires too much work and money, and with the pressure of creditors; that change would have been nearly impossible and if the lack of results come from the change; the company could have faced a hostile takeover from growing companies.
The approach they took it was in my opinion the best approach, previous ownership created a distress in the industry and stakeholders; it was needed to get rid of it. 5. Based on financial and non-financial considerations, which of the competing offers to purchase Adelphia’s assets should management accept and why?
Time Warner/Comcast offer. This because Time warner and Comcast were at the moment the leading companies in the industry as well as the fact that Time Warner was being allowed to distribute $6 billion in shares to the stakeholders of Adelphia in order to ease the debt. Also the offering in shares gives the management of Adelphi a take in the ends of the assets of the company. 6. By the spring of 2005, hedge funds had accumulated significant stakes thought-out Adelphia’s capital structure, including debt issued by Adelphia’s Arohova subsidiary, and debt issued by the parent holding company. How serious are the disputes between these two investors, and as Adelphia management, what could your do, if anything, to prevent these disputes from undermining Adelphia’s sale to TWC/Comcast?
The dispute was serious enough to create a threat to the ultimate sale, specially because at the end of the sale; TWC/Comcast would need to ease the debtors with large amount of money. The main issue the management needs to address is with the consolidation of debt and separates the debt depending on each case and each liability of Adelphia. By giving each debt a different approach, the management can ease up some of the concerns of Arohova and create a better environment for the reorganization.