Why Businesses Go Bankrupt: FairPoint Communications

FairPoint Communications filed for bankruptcy under Chapter 11 on October 26, 2009, hampered by interest payments resulting from the excessive debt it took on in the $2.3 million acquisition of Verizon’s northern New England landlines and Internet network in early 2008.  Remarkably, FairPoint Communications CEO David Hauser was quoted as saying this about the bankruptcy filing, “From a consumer point of view, this is a nonevent.”FairPoint Communications has been plauged by complaints from retail, business and wholesale customers since changing over from Verizon computers to its own computer systems, the “New Hampshire Union Leader” recently reported.  Prior to that, in mid-2008, Vermont 911 calls were not being properly routed, with state officials assigning blame to FairPoint.

Lesson learned: A look at FairPoint’s 10-k report shows that its long term debt went from zero in 2007 (the year before the acquisition) to $2.1 billion at the end of 2008, while net income (profits after interest and tax) went from a profit of $32.8 million in 2007 to a loss of $68.5 million in 2008.  I completely agree with the many bloggers who have already opined that it is hard to understand what the regulators in Maine, New Hampshire and Vermont were thinking would happen when they approved FairPoint’s acquisition of the assets being spun off by Verizon.  Regulators should have considered the advice my friend Cotty, a financial adviser in Toronto gives his clients: you may be able to make the down payment on a fancy new house, just be sure you can also handle the “cost of ownership.”