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Nortel's One Step Foward, One Step Back Dance
By Mark Evans | February 4, 2005
Why does it seem that for every step forward Nortel Networks Corp. takes, it takes one or two steps backward?
Last week, the embattled telecom equipment maker made a positive move when it hired Peter Currie as its chief financial officer. Mr. Currie is extremely well-respected within the investment community, and there is already speculation he will succeed Bill Owens as Nortel's chief executive.
And it took another step out of its financial morass by filing first-half results for last year.
But just when you thought Nortel was starting to right itself, it filed a lawsuit earlier this week against three former executives — Frank Dunn, Doug Beatty and Michael Gollogly. Nortel alleges they manipulated the books in 2002 and 2003 to trigger a program that produced millions of dollars in bonuses and restricted stock units. Now, Nortel wants its money back.
The lawsuit is interesting on two fronts: In today's corporate governance environment, it makes sense to go after executives who have broken the rules; and it is a savvy publicity move to generate goodwill. What better way to show investors that greed and avarice will not be tolerated, particularly when former chief executives such as Mr. Dunn use their booty to build suburban McMansions.
For investors, Nortel's lawsuit illustrates how difficult it will be for Nortel to focus on day-to-day operations. While the company attempts to sell telecom equipment to cautious customers, it also needs to spend time and money handling legal issues such as class-action lawsuits, criminal investigations by the FBI and RCMP, and regulatory investigations by the U.S. Securities and Exchange Commission and the Ontario Securities Commission.
To paraphrase a one-time Saturday Night Live character Roseanne Rosanna-Danna, “It's always something with Nortel.” If it's not a new lawsuit, it's another internal investigation into revenue recognition practices. If it's not competition from Cisco Systems Inc., it's the threat of low-cost rivals from China such as Huawei Technologies Inc.
Like a leaky ship in a storm, this is a company being buffeted on all sides. As much as Mr. Owens, a former U.S. Admiral, can try to bring stability and a sense of calm, navigating Nortel through troubled waters will be a difficult, if not impossible, challenge.
It is important to remember that before the telecom boom of the late-1990s, Nortel was a nice, boring company. It sold equipment to a handful of large customers, and low double-digit revenue growth was an excellent year. It was a stock that widows and orphans liked to own because there were few surprises.
The telecom boom changed everything. Nortel, then led by John Roth, was caught up in the frenzy as new carriers emerged from the fertile minds of entrepreneurs and venture capitalists. It was going to be a whole new world, and Nortel was going to be a key part of it.
As we now know, this was the root of Nortel's accounting scandal. As investors reaped the benefits of the boom, telecom executives started to believe it was their inherent right to share in the riches. After all, they were the ones at the helm so why shouldn't they be handsomely rewarded.
Unfortunately, the strategic focus shifted to boosting the stock price rather than running a fundamentally solid business. It is alleged Mr. Dunn, Mr. Beatty and Mr. Gollogly were willing participants. If Mr. Roth could walk out of Nortel as a quasi-hero with $130-million in exercised stock options, why should Mr. Dunn, et al miss out financially?
© National Post 2005
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