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Why The Fairpint Strike Is Destroying Shareholder Value.

|Includes: FairPoint Communications, Inc. (FRP)

We invest in a firm to earn a return on that investment. Not to provide jobs, or to do charity work, we seek a profit pure and simple. In most cases we worked hard for that money which makes it an analog of our labor. Since it does represent a part of ourselves, in that we earned it, to have it squandered is a profound insult. We labored earnestly for it and we expect those in whom we invest it to do likewise. It is when our agents erode the value of our investments that, as rational actors, we have to get involved. That is why I am writing this open letter, to bring to the attention of Fairpoint shareholders, facts that are important to the security of your investment in Fairpoint.

The best way we get profit is to take the most efficient path, one that includes a sustainable business model, demand for your product as well as low competition. Low competition increases profit on investment. One way to achieve low competition is with a high barrier to entry for competitors. Fairpoint is a firm that is in an industry that has a high bar to entry... but Fairpoint lacks a sustainable business model, within a high demand industry. The fact is, our entire global economy and financial system rely on telecommunications. Make no mistake, telecommunications are here to stay. That doesn't mean the business model of all telecommunications companies are sustainable however.

Telecommunications is a network industry like a railroad or the electric grid. Networks are typically very expensive to set up but inexpensive to run, the cost is dependent on the quality, training and drive of the employees. That has characterized this type of business since the robber barons. The first guy to get his network running, undermined the next guy's infrastructure growth buy providing his product at lower cost. To do that however, the first guy has to have the best product, else the more nimble new guy will jump to that product. Today that product is fiber optics. The most efficient path for a company like Fairpoint, is do everything possible to grow the business in the areas where demand is growing, while maintaining those areas where demand is shrinking, to polish the corporate image.

Fairpoint is liable to fall into the same trap AT&T fell into after divestiture. AT&T got the most profitable lines of business in the Bell System break up. They got telephone sets, PBX's, personal and business computers, Bell Labs and long distance. In those days the cost of a long distance phone call was astronomical compared to today. Management at AT&T thought the price of a long distance call would remain static due to the high barrier to entry. But in doing that, they forgot Adam Smith's Wealth of nations... where there are great profits, people will pile in until there are no profits. Management ran with their assumption and got rid of all the physical lines of their businesses as low profit investment. As it turns out, those physical lines, management at AT&T got rid of, have been hugely profitable and disruptive, while the one line they hung their hats on became hugely unprofitable, and AT&T went bankrupt becoming a shell company. Now SBC has bought the name and is Verizon's only real competitor. In Fairpoint's case, that trap is in lowering CAPEX in the physical plant and risking service quality fines to give overly remunerated upper management another bonus.

The biggest opportunity that Fairpoint has is in meeting the demand for fiber to the premises. Say's law states, "supply drives demand." The demand for faster internet connectivity surpasses demand for any other telcom service.... because the internet meets all those other demands! People are unplugging from cable TV, because they can get television shows they watch, when they want, from the internet. People are unplugging from traditional phone services, because VOIP is cheaper. Who knows what disruptive technology, like 3D printing, may become internet dependent? In the end, the last and only service that will be standing will be internet connectivity, the faster and more reliable the better. Fiber to the premises is the product that cannot be superseded by newer technology and therefore will turn a reliable profit, (pay a dividend) for generations to come. To that end building that Fiber to the Premise should be top priority.

A company must not hobble itself before a race. The image and reputation of a company are it's lifeblood. A company that has built up a reputation of poor service, justified or not, will never reach take off speed in a race to implement a new venture. Customers are just that important. When a company shows indifference to it's customers, worse yet, insult's it's customers, it is building a justifiably bad reputation. That is one of the costs of this protracted strike to the shareholders, the increasingly bad reputation this strike is giving Fairpoint. When it is over, the board of directors can fire the upper management, (with the commensurate pay of a founder) and replace them, as a means of placating the employees... but the customers will be less than impressed.

Building infrastructure requires qualified dedicated workers it simply cannot be done otherwise. Founders of companies know this. Ford famously said he wanted his employees to buy one of his cars. The recognition that good employees make a good company is at the heart of every company that has disrupted the economy in genuine Schumpeterian style. The pattern of economic history is clear, when a company is run by the bourgeois it grows organically, gaining market share and driving it's competitors out of business. Those competitors always happen to be companies that are run by the new class, for the shareholder... the new bourgeois. Valuing the employees is a key difference, those who own the companies they run, pay well and expect performance, the new class always want to cut the pay and caliber of the employees while enriching themselves for it, at the expense of the shareholders.

When Fairpoint took over the Northern states it was a company worth over $20.00 a share and paying a good dividend. Fairpoint came in with a song and a dance about how they would build a system that would be state of the art. What they did was bankrupt the company and implement half measures. Had the debt Fairpoint incurred paying bonuses and implementing half measures, been instead used to totally switch over a few regions to fiber to the premises, that investment would today be paying a dividend. Gene Johnson, knowing full well the new database wouldn't work, (but it was the last piece of the puzzle for his multiple million dollar bonus), he selfishly swung the company into it. Immediately all customer data was lost. That catastrophe cascaded down the company disrupting every facet of the operation resulting in it's bankruptcy.

Gene Johnson's hansom bonus came at a total loss to the investors it was his fiduciary duty to protect. The only thing that kept the company afloat were the employees who had a stake in the company. It was by the sweat of their brow, the database were forced to work, workarounds and bypasses were invented and are used today where the system still doesn't work, those work around measures that saved the company, were invented and implemented by those on the picket lines today, those who protected your investment as best they could, while those pushing them out were the very people who took a $20.00 a share company, paying a dividend, and bankrupted it, destroying the shareholder's investment. The principle agent dilemma writ large.

This strike is eroding shareholder value in a myriad of ways, ways that undermine future profitability of the company... shareholder value. The only ones who stand to gain are the new class management, our agents, who care nothing for our investment, only their bonus. The end result if the union is wiped out... are employees with no stake in the company, a customer base who detest the company, with a doomed to fail business model, and you will be rewarding the malfeasance of your agents... management. That is no way to treat our hard earned money. We bought those shares to earn a profit not to reward some managers who are willing to drive our investment into the ground for their own personal gain. I urge all Fairpoint shareholders to call, or better yet write the company, and order your agents to act in your interests instead of theirs... and call this strike off.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.