By Anthony Ogorek
Williamsville, NY – Adelphia Communications Corporation has been all the rage in the news of late, as the company struggles to fight a war for credibility on multiple fronts. The facts of the Adelphia case will undoubtedly come out in the course of the Securities and Exchange Commission’s formal investigation of the corporation. At this point, however, Adelphia presents a compelling case for investigating before you invest.
In our travels we have come upon the phrase, “it is almost like shooting fish in a barrel” to describe an investment opportunity that conceivably could not fail. That aphorism has to apply to Adelphia. After all, they are a monopoly in most communities. Contrary to what they say on their monthly bills, “thank you for choosing Adelphia,” we don’t have any choice in who we purchase our cable services from. In my experience, if given a choice between giving up their telephone or cable service, many consumers would opt for killing off the phone (especially if they have teenagers).
The fact of the matter is that Adelphia is a monopoly, which does not have to appeal to the Public Service Commission to raise its rates. Seems like an ideal situation to be in; no competition, long-term contracts with municipalities -– definitely a great investment opportunity. Still not convinced? We ran a five year chart of Adelphia’s stock performance which was most instructive. From April 1997 through May 1999, the shares of Adelphia increased by 1,443%. For the same two year stretch, the S&P 500 stock index appreciated by a relatively pale 75%. Is it any wonder that greedy investors hitched their wagon to the Adelphia star? With a performance like this, viewers did not need to turn on their television sets to see “The Greatest Story Ever Told.” They just needed to buy shares of Adelphia Communications Corporation.
Another interesting aspect of the Adelphia story is the concept of corporate governance. Shareholders are actually owners of a small piece of a corporation. The board of directors is elected by the share-holders to represent their interests. In the case of Adelphia, it would appear that corporate governance did not function as advertised. Adelphia is running with a nine member board of directors. According to The Wall Street Journal, five of the nine board members are Rigas family members. Therefore, what we have is a publicly traded corporation being run like a family enterprise; hence the potential conflict of interest with the family controlled Highland Holdings off-balance sheet limited partnership. So although Adelphia may have been running a monopoly, and its stock may have been on a tear, the structure of Adelphia’s board should have given any thoughtful investor pause.
The issue that will bring Adelphia down is disclosure, or more to the point, a lack thereof. Our entire financial system functions on timely disclosure of material information to the investment community. The role of the Securities and Exchange Commission is not to pass judgment on investments, but rather, to ensure that investors have all of the facts. The Nasdaq has threatened Adelphia with delisting its stock because Adelphia has let two deadlines for filing investor information pass. Delisting may be a moot point if Adelphia’s shares continue to drop like a stone.
Financial Commentator Anthony Ogorek is principal of Ogorek Capital Management in Williamsville.