“The Bear” on Business

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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Matt Steinfort, President and CEO of Envysion, was recently interviewed by Larry Nelson of W3W3, an internet radio covering Colorado’s technology community.  Among other topics discussed, Larry mentioned the APEX award that was recently given to Envysion for “Most Innovative Technology Product.”

With tremendous promise, Genuity and the Black Rocket were launched in 2000.  Revenue hit $1.2 billion in 2001, up from $183M in 1997.  Along the way, it racked up $3B in debt and a whole bunch of annual losses–$4B a year in 2001 with no end in sight. 

No worries.  Sometime between 2002 and 2005, Verizon would certainly exercise their option to acquire Genuity.  In July of 2000, Genuity’s share price was around $3.50/share. 

On Monday July 23, 2000, Genuity drew $723M from its bank facility.   On Wednesday July 25th, the Dow Jones soared 489 points, its best day in 15 years. Genuity’s shares plunged 26%, to $2.59/share.  After the markets closed on Wednesday, Verizon announced it would not exercise its right to take control of the company, causing Genuity’s stock price to drop 89% the following day, to 29 cents.  Genuity claimed it’s drawing of the debt was purely coincidental with Verizon’s announcement for it had no idea Verizon would take this step.  Hmmmm.

A few months later, Level 3 reached a definitive agreement to acquire Genuity.  They were downright nostalgic about owning AS1.  By the time the acquisition closed on February 14, 2003, Level 3 paid $60 million in cash to Genuity plus $77 million in cash for prepayments to Verizon for network services.  A tag line on Level 3’s press release was “Transaction Accelerates Free Cash Flow Positive Projection to Second Quarter of 2004.” 

I left Level 3 right around the time this transaction closed.  In fact, the last project I did for Level 3 was some work on what to do with Genuity’s enterprise business. 

I don’t know the total investment that went into Genuity.  Hopefully a reader will help.  In the meantime, I will put them down for $6B.

One of the most important operational finance metrics to track is Net Installs.  Sandi Mays, in her much-more-practical-advice-than-anything-you’ll-find-in-bearonbusiness blog (otherwise known as businesstoolsblog.com) has a great post today on net installs.  She emphasizes why it is important to both track past performance AND a reliable forward-looking projection. 

We are religious on this topic at Zayo.  Whether the news is good or bad, this approach is one of the most important early-warning indictor of future revenue performance.