Nortel: Canada's Enron?
So Frank Dunn got it? Is anyone really surprised? After all, he's been Nortel's chief financial officer - directly or indirectly - since 1999 so the accounting problems - officially described by chairman Red Wilson as “accountability” issues - eventually get back to his desk. Whether Frank directed the entire number massage exercise or simply exerted his influence is a mute point. Nortel's books are in terrible shape and there is growing speculation it was all due to a lucrative bonus program tied to a return to profitability. My take is that Frank wanted Nortel to be profitable and articulated this goal in no uncertain terms to his hand-picked financial lieutanants. When it appeared Nortel would have a slight loss in the first-quarter of last year, his boys figured that by cooking the books to show a slight profit, everyone would be happy. Dunn would be pleased that his ambitious goal was achieved, investors would be happy Nortel was a good investment again, and, best of of all for Nortel's executives and employees, the bonus plan would come into play. It was all too tempting for the number crunchers to resist. In the end, they were caught with their hands deep in the cookie jar. Why the board or Nortel's auditor, Deloitte Touch Tohmatsu, didn't catch this all earlier is a mystery. We'll likely have to wait for the Securities & Exchange investigation to be completed before the truth is finally told. Any way you cut it, it stinks. As for Dunn, he joins Paul Stern and John Roth in Nortel's dubious CEO Hall of Shame.
May 2nd, 2004 at 2:45 am
Mark, that's quite a provocative title… While I cannot speculate on motives, and do not know the answers to the questions that you ask, I can say that, based on the knowledge that I have about the details thus far, this scandal is nowhere near an Enron or a Parmalat. The company and the board acted swiftly and correctly when discovering the irregularities and that certainly ought to be worth something to a few investors. Based on the information disseminated by a few folks I know who are intimately familiar with Nortel, the restatement should only affect operations, leaving both revenues and cash on hand pretty much intact. Moreover, a lot of the reporting on operations was subject to interpretation…
This could very well signal that once the SEC concludes its investigation, the storm can be over quickly without too much extra damage. I believe that the investigation turn-around time can be shorter than anticipated, since the SEC can apply its know-how from the Lucent case and in addition, Nortel has been extremely cooperative. If you take a five year stock performance chart (from say, 2002 to 2007) this will probably look like just a minor blip in the stock price. But what should be concerning Nortel investors more on the short run is the news from Asia that China might not deploy 3G as quickly as some analysts were previously forecasting. Another worry is that the Verizon deal thus far has proven itself to be more oriented towards the replacement of the legacy TDM enterprise equipment (i.e. Norstar KTS and Meridian PBX) with newer VoIP gear (BCM and the Succession 1000, respectively). Thus far, there hasn't been too much happening on the carrier side (reports from Solomon Smith Barney indicate that Verizon is still testing the VoIP gear from Nortel in its labs and that the only product actually being deployed is the MG 9000, but in its VoATM flavor, and not pure VoIP). Despite that, the moves towards next-gen wireless networks and from circuit to packet switching both on carrier and enterprise networks should benefit Nortel in the long run. The company remains well positioned in these areas to capture the gains due to the above technological transitions.
Ronald (from Frost)
Disclaimer: These opinions are my own and do not represent those of my current employer…
October 27th, 2004 at 11:16 pm
Nortel will be $2 by Christmas.
Everyone should actually short this stock until it hits there, and even then maybe hold on.
Canadians need to wake up. Scandal after scandal, missed targets, etc, etc.
I use CFDs (contracts for Difference) to short this puppy, 20,000 shares at a time (need only 5% margin.
Good luck, and get short.