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WSJ Comments On Idearc Bankruptcy & Verizon Culpability

Verizon & Involvement in Fairpoint Communications & Idearc Bankruptcy FilingsA few days ago, the Wall Street Journal’s Dennis Berman commented in his column entitled “The Two Sides of Verizon’s Deal Making” on whether Verizon might have some responsibility for the bankruptcies of Idearc, Hawaiian Telecom and FairPoint Communications. As you may recall, I posted an op-ed piece on the subject, Idearc’s Bankruptcy – Who’s Really Responsible? at Search Engine Land not long back, and now Berman’s take on the issue appears to hold a lot of sympathy for my position that Verizon caused the yellow pages company to fail shortly after it was spun off by requiring it to do so with an unreasonably high debt load.

Berman states that while the market in 2006 may’ve allowed Verizon to take billions in the deal divesting itself of its directories corporation, Idearc, he further states:

“It took too much.”

Will there be any consequences for Verizon’s throwing off these companies with unserviceably high debt loads? Burman reports:

“These things matter greatly to how state and federal regulators perceive the company. Maine, New Hampshire, Vermont and Hawaii each are in an uproar over the FairPoint divestiture, with much of the ire directed at Verizon.”

In a brief video piece, David Berman debates the issue with Evan Newmark, who takes the opposite viewpoint that Verizon should not be held responsible for the performance of its divested companies.

I find part of Newmark’s argument in the vid segment to be facile. He initially argues that Verizon’s CEO, Ivan Seidenberg, did a clever/good thing because “…he unloaded these companies before they could go under within Verizon!” This is just plain dumb, because they wouldn’t have failed within Verizon. In the case of Idearc, the business unit was too small to cause the great corporate mother ship to founder, and it’s the Verizon spin-off debt load it was saddled with that caused it to be unable to function in the first place. He misses the point that Verizon took too much money out of the spinoff deals. Those weren’t existing debts associated with those business units prior to their divestment.

These companies wouldn’t have “gone under” within Verizon. It’s possible that if a business unit starts to lose money for a quarter or two, the board would naturally require it to correct itself in some way. But, arguably these companies experienced a much higher degree of financial problems due to the extremely high debt they were required to service subsequent to spinoff. These spinoffs funded Verizon’s FiOS expansion — a gigantic project that was paid for by Verizon offloading the investment costs to the companies it spunoff.

So, this was not at all a normal case of companies failing to survive in the competitive marketplace: they were sandbagged at the outset.

In the video, Berman cogently states that “…it raises the question of what responsibility does a seller have to the health of a buyer’s target afterwards…”.

To this, Newmark responds, “Caveat emptor” (well-known Latin phrase meaning “Let the buyer beware.”). One wonders if Mr. Newmark would be quite so glib if he were on the receiving end of a lemon the next time he purchases an automobile. I think not. This is essentially what I’m stating has happened to stockholders of these Verizon spinoff companies.

Newmark finally, grudgingly, states that because it’s a heavily-regulated company, “…Verizon cannot be doing deals which appear to rip people off…”.

I’d go a bit further and say that if it looks like a rat and smells like a rat, it’s a rat.

It will be interesting to see if the Securities and Exchange Commission gives Verizon a pass on their spinoffs of bankrupt companies as Newmark seems to think reasonable, or if they don’t respond in some way to consumer and state government complaints.

3 comments for WSJ Comments On Idearc Bankruptcy & Verizon Culpability »

  1. MyAvatars 0.2

    I am a heating and air conditioning company that signed up for idearc advertizement and was duped into beleving that my business could get 23 times the dollar invested. What happened is click fraud from their internet service advertizement. I have canceled my automatic credit card account deduction to avoid getting ripped off by idearc media.

    Comment by jose gonsalez` — 10/8/2009 @ 11:02 pm


  2. MyAvatars 0.2

    I am deeply disappointed to get a notice from
    a Texas court stating Idearc is bancrupt.
    Verizon didn’t do it’s own shareholders any
    favors by spinning Idearc off.

    My Verizon shares are down considerably.

    Verizon needs to explain this situation to
    its shareholders now.

    Comment by ginni — 10/17/2009 @ 7:06 pm


  3. MyAvatars 0.2

    Idearc shareholders did sue Verizon for this unloading; In a federal class action, Idearc shareholders sued Verizon for its less than stellar spinoff of Idearc, formerly Verizon’s telephone book division, which has filed for bankruptcy. The class calls the spinoff “a massive, Enron-style debt off-loading spin transaction”.
    The class claims that the Idearc flop was “just one of three such transactions accomplished by Verizon Communications [that were] followed by quick bankruptcy – Hawaiian Telecommunications Inc., Idearc Inc., and Fairpoint Communications Inc.”
    The shareholders claim Verizon did the spinoff so it “could escape federal taxation,” and resorted to it only “after a series of failed attempts to sell the subsidiary to potential bidders.”
    Source: http://www.bankruptcychapter7information.com
    They add that “Idearc, as agent of Verizon, both participated in the fraudulent debt transfers, and now just two years later, in bankruptcy, has caused a cancellation of the common, [sic] since no monies have been lost.”
    The class claims the dodge is so transparent they deserve summary judgment for misuse of federal franchise, a securities “fraud on the market,” common law fraud and insider trading.

    Comment by Hashim — 3/30/2010 @ 7:47 am


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