Can Owens Save Nortel?
When Nortel Networks Corp. fired three senior executives in April, including CEO Frank Dunn, it was supposed to be the start of a much-needed healing process.
Instead, Nortel finds itself with a board under pressure from institutional investors; rivals that appear to be stealing market share; an accounting scandal showing no sign of going away; and a new CEO, William Owens, who has received mixed reviews at best.
Amid these issues and challenges, Nortel is aiming to slash annual expenses by US$450-million to US$500-million through the elimination of 10% of its workforce, a reduction in research and development spending and the consolidation of business units.
All of this makes it painfully apparent Nortel is in as much flux as it was six months ago when Mr. Dunn, chief financial officer Doug Beatty and controller Michael Gollogly were let go “for cause.”
The latest example of Nortel's dysfunctional existence is an expected board overhaul. Due to pressure from institutional shareholders, many of its 11 directors will likely not seek re-election at the next annual shareholders meeting — including long-time chairman Lynton (Red) Wilson.
This is far from an ideal situation for Mr. Owens, 62, an ex-U.S. Admiral, who has been a member of Nortel's board since 2002. Despite his impressive military track record, his telecom experience is visibly thin when stacked up against someone like Lucent Technologies Inc. CEO Patricia Lusso, who has telecom executive experience that goes back to AT&T Corp. in the early 1980s.
Since taking the helm, Mr. Owens has been spearheading an aggressive public relations campaign — meeting with employees, analysts and investors . But the Street is already grumbling.
“He waved his hands a lot when he told us about his strategy but he didn't answer any questions,” said one analyst, who asked not to be named. “He has not worked in commercial enterprises similar to Nortel and doesn't know the telecom sector. The board put him in there because last time they needed a CEO, it took them six months. In the end, they got turned down by every outsider so they settled on Frank Dunn.”
Some however, are ready to give Mr. Owens more time to prove himself. Lawrence Surtees, head of telecom and Internet research at IDC Canada, said Mr. Owens was a good choice because he had been on the board and was active in high-tech, including a stint at Teledesic LLC. “This is not some run of the mill Dilbert-like manager,” he said. “This is a guy who is focused, intense, and to have risen to the rank he did [in the U.S. military] and introduced the stuff he did in the institution, speaks legions to some overlooked traits of his management/executive organizational ability.
“It may be a real coup to have this guy - he is no a slouch. I think clearly he is capable of possessing and grasping and wrestling with big strategy, translating vision into action, and recognizing you have to galvanize people. This isn't quite the moment or time to start bringing some radical new vision to Nortel until they deal with some of these immediate crises.”
Perhaps the biggest challenge for Mr. Owens is changing market dynamics. Intense competition, including emerging rivals from Asia such as Huawei Technologies Co. Ltd., means Nortel expects single-digit sales growth this year, which will be slower than the telecom equipment industry overall.
In a research note, RBC Capital Markets analyst Mark Sue said Nortel's performance may be due to soft demand for optical and enterprise equipment, and a slowdown in wireless spending, which has become Nortel's largest business. He is looking for more insight today when Nortel provides its bi-weekly update to the Ontario Securities Commission.
At the same time, Nortel has to deal with a crucial change in the market from large, expensive hardware to lower-cost products that feature more software. This means the contracts Nortel wins may be smaller. It may also see the company's revenue drop from the US$10-billion level unless it can win significant market share.
Mr. Surtees said lower sales could force Nortel to make even more cutbacks. The question is how far can the company go? “Given the new top line number, at what point will that mean abandoning a business unit in its entirety,” he said.
A senior Nortel executive said the company needs to look at where the market is going and prepare itself for the best and worse case scenarios, which could mean revenue of US$7-billion to US$11-billion a year. He said management needs to get a strong handle on a reasonable cost structure to withstand a bad quarter. “We have tried to be as rational and practical as we can,” he said. “If we are down to 20,000 employees, US$7-billion in revenue and we are profitable, we can produce a reasonable return to shareholders if we have a bad quarter.”
Nortel put on a brave face yesterday, insisting that its board is united in its efforts to resolve the company's problems. But old board or new board, neither may be able to help Mr. Owens overcome Nortel's mounting problems.
