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Adelphia Communications:A Case Study

Jim Mahar

Carol Fischer

St. Bonaventure University

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

The Rise of Adelphia

Key Growth Strategies• Geographically dense operations• Emphasis on customer service• Focus on suburbs (as opposed to metropolitan

areas)• Aggressive acquistions1986: IPO – shares widely held & traded on

NASDAQ1999: stock traded as high as $87 per share

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

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 DirectorsFamily owned 77% of voting

rights

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

Adelphia’s 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 firm’s debt

• Parent company largely protected in event of bankruptcy of individual subsidiary

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

Hard Times for Adelphia

Adelphia Stock Price (data from http://finance/yahoo.com)

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The 3/27/02 Analysts Meeting:A 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

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

Chronology of Events

4/1/02: Adelphia delays filing annual report4/2/02: Shareholder lawsuits filed5/8/02: Adelphia solicits bids for cable systems in

LA and the Southeast US5/15/02: John Rigas resigns as Pres & CEO;

NASDAQ stops trading in Adelphia stock5/16/02: Tim Rigas resigns from CFO5/23/02: John, Tim, Michael & James Rigas resign

from Board of Directors

Chronology of Events

5/24/02: Adelphia discloses details of Rigas family’s use of company assets for personal use

6/3/02: Adelphia’s stock is delisted6/9/02: Adelphia dismisses Deloitte & Touche6/11/02: Peter Venetis (Rigas’s son-in-law) resigns

from Board6/14/02: Adelphia hires PriceWaterhouseCoopers &

terminates employees “whose primary function was to provide service to members of the Rigas family”

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

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