After being slammed for Fairpoint deal, Idearc shareholders sue telco...
Three of Verizon's biggest divestitures in the last few years haven't turned out too well -- at least for companies not named Verizon. Both Fairpoint Communications and Hawaiian Telcom went bankrupt, after the debt incurred by their deals with Verizon resulted in the companies simply imploding. Those companies then of course couldn't even properly run their networks, much less upgrade them to next-generation technology. Customers under-served and unwanted by Verizon then wound up with carriers that were crushed under the weight of Verizon debt.
Fairpoint and Hawaiian Telcom of course deserve a huge part of the blame. Either the companies' eyes were bigger than their metaphorical stomachs and they were incredibly over-confident, or the plan all along was to blow off the debt in bankruptcy. If the latter, Verizon's lawyers are certainly smart enough to know about it -- and the end result was a long line of defrauded creditors. Fairpoint meanwhile fought giving consumers rebates for outages, and only recently was forced to pay Maine consumers about $1.72 per line a month for 12 months
Though given less attention, Idearc, formerly Verizon's telephone subsidiary, also went bankrupt after Verizon employed the same techniques to avoid paying taxes on the spinoff. All three deals involved a tax-loophole known as a Reverse Morris Trust
to avoid tax penalties, while dumping debt onto their deal partners. Idearc shareholders this week sued Verizon
, claiming Verizon's been consistently engaged in "Enron-style" skulduggery. The problem is that (for now) Verizon's tax-dodging procedure of choice may be unethical and have anti-consumer ramifications, but it's perfectly legal. But shareholders are rightly annoyed:
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."
Of course the suit comes as Verizon prepares to do their biggest-such deal yet: offloading six million DSL and landline customers in more than a dozen states to Frontier Communications. That deal has recently come under scrutiny by an Illinois Judge's report that found the deal serves Verizon and Verizon only
. Of course heavily-lobbied regulators continue to approve these deals with wimpy conditions they then fail to properly enforce. Meanwhile Verizon this week is busily arguing the FCC should have no authority over them
, while waiting for what will be the likely and inevitable FCC approval of the deal.
Are we noticing any systemic failure at work here yet?