Bear On Business

This is a continuation of Saturday’s post.  We just explained to a telecom consultant that we don’t have a centralized network organization.   Each of our businesses manage their own network, do their own IT, run their own NOC, etc.  The consultant was advising a private equity firm that is considering a Zayo investment, so he was absolutely correct to probe in this area.  He understood what we were saying, and the logic behind it, but he remained a bit skeptical.

“Let’s say you centralized the right way.  Wouldn’t you gain a profitability lift due to the synergies?”

I answered with a series of questions:

“Would Neutral Tandem be more efficient if it combined its NOC with Cogent’s?”

“Would Akamai be more profitable if it shared its engineering organization with Yipes?

“Would Cbeyond have a higher EBITDA if it’s IT department also attended to Megapath’s requirements?”

“Would Paetec gain synergies if it had the same provisioning system at Fibertech?”

You know my answer to these questions.  No.  Yet I will guarantee you every one of the companies above would lose its competitive edge as a result of pursuing the quest for synergy.

I was meeting with a telecom consultant a little while back.  They were advising a private equity investor, who in turn is considering an investment in Zayo. 

We hit the part of the discussion in which we discussed Zayo’s organizational approach.  We explained what we meant by three separate business units.  “Down to the balance sheet and individual bank accounts!,” emphasized Ken desGarennes, Zayo’s CFO.

I couldn’t tell whether the consultant was buying into the discussion, or not.  He had a right to be skeptical, as what we were describing was counter to the path that all big telco’s take.  The consultant asked a clarifying question:

“Where’s the Network?”

John Scarano began to answer: “We have a intercity fiber between NY and Chicago; metro network in Memphis and”.   I jumped in, as I was quite certain the question had nothing to do with geography.  The consultant was asking which of our organizations was responsible for the network functions, such as engineering, NOC, and capital spending.  My answer:

“They all are.  That is, they each have responsibility for a certain piece of the network–the piece that is core to their business.  Some of them purchase services from their sibling business units, but only to the extent needed.”

I knew what question was coming next (tomorrow).

Somewhere between going into chapter 11 and coming out in ~ late 2003, Adelphia Business Solutions name was changed to TelCove.  During the bankruptcy process, it shut down many of its markets, scaling the 200 to perhaps 50.  The private equity firm Bay Harbor led them out of bankruptcy, with Bob Guth eventually taking over as CEO. 

In late 2004, TelCove acquired a number of markets from KMC.   TelCove spent 2005 being courted by Time Warner Telecom.  As they struggled to get the definitive agreement to the finish line, Level 3 parashooted into Coudersport, PA.  In a brisk weekend of discussions, LVLT and Bay Harbor got to a handshake.  A few months later, TelCove became part of Level 3 for a staggering price of $1.24B.   Bob Guth and the Bay Harbor folks did very well.   Perhaps Bob and Bay Harbor bought that Coudersport golf course that the Rigas family built with “co-borrowed” Adelphia money.

Time will tell as to whether or not Level 3 overpayed.  I think most people in and out of Level 3 would cite this as the least-attractive acquisition they did during their 2006 and 2007 buying spree–but it might still be value accretive.

Excluding KMC portion, I’ll guess Hyperion contribution to the Fiber Boom was $3B. 

Nice.

Zayo crowd–please do not read further.

Rest of telecom crowd.  Please read on.  Did you read “Allocated Cost is Bad?”  Isn’t Sandi Mays naive?  Cher Horowitz had more of a clue.  Sandi should know better. 

How can she possibly think it is efficient to have multiple NOCs?  Can you imagine how de-optimized the network would be if a centralized engineering group isn’t responsible for technology decisions?  The network is a factory; how could costs be assigned to business units in anything other than an arbitrary way?  More than one provisioning system–are you kidding me?  Distributed financial and legal–chaos is the only outcome?  No IT Architecture; no CIO–can you even picture the spaghetti that the systems would become? 

Correct you are, I say, for thinking this way.  Centralize, centralize, centralize.  Functionalize, functionalize, functionalize.  Standardize, standarize, standarize.  Prioritize, prioritize, prioritize.  That’s the telecom way.

Zayo will take a different approach.

Earlier in the week, I wrote about Hyperion, the highly irregular-shaped 16th entrant to the Telecom fray.  It had relationships with AT&T, MCI, and many CATV companies.  I asked, what could possibly stop them in their tracks? 

Greed.

In 1999, Hyperion’s name was changed to Adelphia Business Solutions.  Although it was a wholly owned subsidiary of Adelphia Cable, it was (I think) publically traded as a tracking stock.  John Rigas, then head of Adelphia Cable and now a resident of Butner Federal Prison in North Carolina , was the chairman of Adelphia Business Solutions.  

During the bubble, Adelphia Business Solutions bought out all or most of the partnerships with their CATV cohorts.  At its peak, it was well on track to offer service in 200 U.S. markets. Then along came the crash. 

Appearantly the Rigas family was having trouble putting food on the table in the early 2000s.  That’s okay, they figured, they’d just borrow some dough from Adelphia.  “It is our company, isn’t it?”, might have been the conversation during a Thanksgiving dinner. 

The following are excepts from an USA Today article written by Leslie Cauley:

On March 27 2002, in accordance with new SEC accounting rules, Adelphia disclosed that the Rigas family had “co-borrowed” $2.3 billion with the company over a period of time. Concerned that highly leveraged Adelphia would have to borrow an additional $1 billion, at least, because of the loans, investors drove shares down 30% that day.

As criticism mounted, Deloitte & Touche, Adelphia’s auditor for 20 years, started reviewing the audit it had completed but hadn’t yet certified. By then, Rigas says, the firm had declared the just-completed review “our best audit ever.” To celebrate, he says, James Brown, Adelphia’s vice president of finance, threw a party for the Deloitte auditors and the accounting staff at a local hunting club. The celebration didn’t last long. Deloitte refused to sign Adelphia’s federal 10-K filing, causing company shares to be delisted. By summer, Adelphia had filed for bankruptcy-court protection.

On July 24, 2002, Rigas and sons Tim and Michael, Adelphia’s head of operations, were handcuffed and arrested in New York City. Brown and Michael Mulcahey, director of internal reporting, were arrested in Coudersport. The charges included securities, bank and wire fraud.

John Rigas was tried and convicted of securities fraud in 2004 and is serving a 15-year sentence.  He is 83 years old.

Just prior to Adelphia Cable going bankrupt in 2001, Adelphia Business Solutions was spun out along with a bunch of debt.  A few months thereafter, ABS followed its former parent into bankruptcy. 

What happened to Adelphia Business Solutions? Those at the Mecca in Broomfield certainly know.  The rest of you will need to check back into bearonbusiness in a day or two.

Though she earned her “A-Mays-ing Sandi Mays” nickname many times before, she took it to a new level with her post this past Friday on her Business Tools Blog.  The topic she covered is near and dear to my heart–it is what we believe is key to unleashing value at Zayo Group. 

The title of the post is bland: Allocated Cost is Bad.  But don’t be fooled…if your business is telecom and your company is big and complex, this post is your blueprint to value creation. 

Do you agree?   I hope you don’t (that is, if you’re not part of Zayo).  Why? Because Zayo will benefit from having weakened competition and future acquisition targets.  Perhaps later this week, I’ll provide some ammunition for the naysayers. 

Michael Wilson, Envysion’s CFO and reigning champ of my annual Texas Hold’em tourney, has a couple fun-to-read posts on the Managed Video as a Service blog. The great and colorful Yogi Berra provides the backdrop. The first one is titled “You can observe a lot just by watching” and the second is “We made too many wrong mistakes.” Take a look.

Hyperion, the sixteenth satellite of Saturn, is the largest highly irregular (non-spherical) body in the solar system.  Penn Access, which later changed its name to Hyperion, was about the sixteenth entrant into the Telecom Boom party.  It too, as it turned out, had a highly irregular shape.

Penn Access was a Pittsburg-based Competitive Access Provider launched by three AT&T veterans in the late 1980s.  In 1991 or thereabouts, the named was changed to Hyperion and (though I am not sure how) it became a subsidiary of Adelphia Cable. 

In the 1990s the RBOCs were the arch enemy of AT&T and MCI.  In the 2000s, the RBOCs bought AT&T and MCI–so they are enemies no more.  But they were 15 years ago.

Apply the adage “the enemy of my enemy is my friend“, AT&T and MCI desired partnerships with cable TV companies.   Cable TV would lay fiber for their residential fiber/coax networks while AT&T and MCI would use these networks to bypass the RBOCs.  Hyperion, with emphasis on the first five letters of their name H-Y-P-E-R, hyped up their role in this to anyone who would listen.  AT&T and MCI bought into it, and named Hyperion a preferred provider for local access.  Adelphia, a major CATV company, evidently bought into the height as well–as they ended up the Hyperion’s owner.  Other CATV companies followed suit and several 50/50 joint ventures were formed to leverage fiber buildouts within CATV serving areas. 

Hyperion was unstoppable.  It had the key customers (AT&T and MCI),  a wealthy owner (Adelphia), and access to unique network (the fiber plant of its CATV partners).  What could possible stop them in their tracks? 

Holy crap.  The best, most articulate, most powerful post ever “on” bearonbusiness wasn’t written by me.  I don’t know whether to be upset or proud; jealous or appreciative; jubilant or juvenile.

While I decide how to react, I’ll share it with my readers.   But not until Tuesday. 

Blogging is going mainstream.  Even Carl Icahn now has a blog.  It is called The Icahn Report.   He promises to share with us his techniques for unleashing value through good corporate goverance.  I will add it to my blogroll and my google reader.

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