Adelphia Communications Corp.’s Bankruptcy Harvard Case Solution & Analysis

Adelphia Communications Corp.’s Bankruptcy Case Solution

Problem Statement

This case focuses upon the 11th largest fraud scandal in the history which took place at the hands of the Rigas family made Adelphia in the year 2002. There are several options which are being contemplated by the company to turnaround its situation and recover from financial distress including offers of $ 17.6 billion all cash and stock offer, $ 17.1 billion cash only offer and $ 15 billion cash only offer from, Time Warner-Comcast, Cablevision and KKR respectively. A number of issues need to be analyzed and assessed before a final decision is made.

Adelphia’s Financial Distress

a) There was lack of transparency among the board members and the management of the company. The management was filled up with the close friends and the family members of Rigas. Management members were not neutral and independent at all. One example is the signing of the co-borrowing arrangement despite the fact that the company was highly leveraged.
b) The lenders of Adelphia could have either not lent or placed significant covenants on the company before lending them in the co-borrowing arrangement specially. Despite getting rid of existing debts, John Rigas was borrowing additional debts and also there were no audits and financial planning in place. Lenders should not have lent in these circumstances.
c) Most of the analysts believe that complete control over Adelphia was one of the significant reason which had contributed towards John to use the Adelphia account for his personal expenses but I think there were many other reasons due to this occurred. Complete control of stakes cannot be the reason due to which this fraud took place. Other reasons which were significant were no long term planning, unplanned acquisitions, Wall Street pressure and lack of transparency among the board of directors.

CBAs and LEPPs

a) The co-borrowing arrangement was a major contribution to the overall fraud scandal which occurred at Adelphia. The $ 2.3 million consolidated liabilities of the company had failed to be recorded and were not recorded in the right names of the credit facilities under which the company was a co-borrower and severely and jointly liable for all of the outstanding debt held by the Rigas entities.
b) There is no positive aspect for purchasing the stocks back through the co-borrowing agreement of the company because the main motive of the owners was basically to look for ways to buy more stock for themselves and this they did to avoid dilution of the share price later.
c) Under LEPPs the credit of the sponsoring company is leveraged in order to borrow money. In case of no company loan guarantees, the lender keeps the treasury shares as collateral until the loan is repaid. Under partial guarantees, the collateral shares are released partially and under full guarantees, there is no collateral provided.
d) If we assess the structure of CBAs and LEPPs at Adelphia then it is clearly evident that these had contributed severely to the fraud scandal that had taken place. The co-borrowings had been used to buy back the stock of the company but the funds were also utilized on a variety of the personal projects of the owners.

Adelphia’s Business

a) Prior to the bankruptcy filing the performance of the company was very weak. Qualitatively the, management and the board of the company were weak and there were many corporate governance issues within the company. On the other hand, quantitatively, the liquidity position of the company was weak which is seen in the balance sheets from 2001 to 2004 which shows that the operations of the company were highly stressed. A negative interest coverage ratio had been seen by the company in these years. Moreover, if we look at exhibit 10(a) then it could be seen that the total equity of the shareholders was weak during these years. This was a deteriorating performance which had already signaled its demise...................

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