NEW YORK (CNN/Money) -
The "Philadelphia Story," released in 1940, was an Oscar-winning romantic comedy that featured Katharine Hepburn, Jimmy Stewart, and Cary Grant. The Adelphia Story, now playing on stock exchanges near you, promises to be considerably less memorable.
Last week, shareholders and bondholders of cable giant Adelphia Communications (ADLAC: up $0.42 to $10.42, Research, Estimates) were hit by a double whammy. First, Internet/telecom spinoff Adelphia Business Solutions (ABIZ: Research, Estimates) filed for Chapter 11. Then Adelphia disclosed that it has guaranteed as much as $2.3 billion in loans to partnerships or other entities controlled by the Rigas family, which founded Adelphia and still essentially runs it. It turns out that some of the cash borrowed may have been used to purchase stocks or other securities from Adelphia, whose value has fallen sharply.
In the past few years, scores of publicly-held companies have made, or guaranteed, loans to their fabulously wealthy top executives -- frequently with poor results. Troll through enough proxies and you'll find that some companies have more related-party transactions than Oedipus Rex. This year's honor for Biggest Debtor at a Fortune 500 Company goes to Worldcom (WCOM: down $0.24 to $6.26, Research, Estimates) chairman Bernard Ebbers, who last February borrowed an astonishing $341 million -- at 2.14 percent and 2.18 percent interest rates -- from his firm. Ebbers needed the bailout because the Worldcom stock and other assets that were backing loans he had taken out from Worldcom and other creditors had fallen sharply in value.
Like analysts Mary Meeker and Jack Grubman, executive loans are creatures of the late 1990s, hopelessly saddled with conflicts of interest. New-economy hotshots wanted oodles of cash so they could exercise options or buy stock, second homes, and yachts. Conveniently, their yen for dollars jibed with activist investors' demands for top executives to own real shares -- instead of just options. The tax-efficient answer? Loans.
As the dotcom bubble inflated and competition for seasoned executives intensified, some tiny businesses became big-time lenders. In March 2000, NBC Internet gave newly recruited CEO William Lansing a $4 million, interest-free loan so he could go house-hunting. The sum was roughly the same as the company's revenues that quarter.
Priceline.com (PCLN: unchanged at $4.58, Research, Estimates) dished out loans to top executives like short-order cooks sling hash: $9 million to former president and CEO Daniel Schulman; $2 million to Jeffery H. Boyd, the current president and chief operating officer; and $3 million to Heidi Miller, who served as chief financial officer for eight months. Her loan was forgiven when she left.
Many companies still have loans on their books. As of last summer, interactive television software company Liberate Technologies (LBRT: down $0.03 to $5.43, Research, Estimates) had loans outstanding to president Coleman Sisson ($500,000), chief strategy officer David Limp ($500,000), and executive vice president for sales and service Donald Fitzpatrick ($1.5 million). According to its most recent proxy, Imagine Media spinoff Snowball (SNOW: up $0.60 to $7.60, Research, Estimates), which sports a market cap of $12.9 million, is owed at least $835,000 by CFO James Tolonen and trusts affiliated with him.
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A couple of years ago, such loans seemed relatively benign. But today -- with banks skittish, the high-yield debt market burned by defaults, and even some creditworthy borrowers locked out of the commercial paper market -- things are different. Given these conditions, it would be almost gratifying to see a credit crunch where it's really needed: in the corner office.
It should be self-evident to corporate boards that doling out huge chunks of the corporate kitty to top executives, at highly favorable rates, is poor cash management. And investors should regard cut-rate jumbo insider loans as a sign that bosses and directors don't take their overall fiduciary responsibilities seriously. Raise your hand if you're surprised that Kenneth Lay had a multimillion-dollar credit line at Enron.
In these tough times, managers in search of wisdom have turned to everyone from Machiavelli to Ulysses S. Grant. But leveraged CEOs may want to take a page out of Benjamin Franklin's Poor Richard's Almanac: "He that goes a borrowing goes a sorrowing."
Eric Hellweg is on vacation. Daniel Gross is the author of Bull Run: Wall Street, the Democrats, and the New Politics of Personal Finance. He welcomes your feedback at DGross6453@aol.com.
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