It looks like we'll get a much better picture of Nortel's financial health in a couple months. The company said yesterday it will be able to release its 2003 and 2004 first and second-quarter numbers by the end of August, as well as updates on how much its financial statements will be affected after an independent audit committee completes its work. The question is whether/if Nortel will provide information about why CEO Frank Dunn, chief financial officer Doug Beatty and controller Michael Gollogly were fired “with cause” in April. It has become clear the audit committee – headed by ex-Royal Bank of Canada CEO John Cleghorn – had done a fair bit of work before it came to the conclusion that Dunn, Beatty and Gollogly had to be shoved out the door. If the magnitude of Nortel's accounting problems are relatively minor, it wil be interesting to see how Nortel paints its decision to clean house.
In the wake of Canada's federal election, the folks at the Canadian Radio-television and Telecommunications Commission must be relieved the Conservative Party came up disappointingly short of seats. If the Conservatives had won the most seats in the House of Parliament, they would have gutted the CRTC, while introducing more U.S. programming and allowing U.S. satellite providers to operate north of the border. For anyone in favour of protecting Canada's culture and identity, the Conservative's plans were heresy. It was just another one of the Conservative's flawed ideas that clearly caused many Canadians to pause when they got to the polls yesterday. For the telecom industry, the election means regulation will remain an important element under the leadership of Charles Dalfen. As a result, competition will be encouraged but the incumbents carriers will be closely supervised.
Mitel Networks filed a 6-K earlier this week with the U.S. Securities and Exchange Commission with some interesting numbers. While revenue dropped 15% in the year ended April 30, 2004 to $461-million,a growing amount of the company's sales are coming from IP equipment rather than older PBX technology. To a large extent, Mitel's success depends on how aggressively corporate customers move to IP technology. There is good momentum in the PBX market as older PBX equipment is replaced by IP-PBX technology. It is more difficult, however, to find strong growth in other sectors. In a recent meeting, Avaya Canada president Mario Belanger said much of the IP action is happening at the edge rather than the core. Many companies, he said, are looking to leverage what they already have with some new IP technology. It is supplement rather than rip and replace. If this trend continues the IP revolution could be a very quiet evolution – rather than a revolution. Based on the SuperComm show last week in Chicago, IP is really happening in the network core as carriers move to make their systems more efficient. As carriers such as Bell Canada and Telus moved to offer managed service, the corporate market could slowly move along in parallel. IP is where it's at, but it's a long-term development.
So what does Darren Entwistle do today about Microcell, which refuses to play nice with Telus' hostile $1.1 billion takeover offer. A likely scenario is Telus maintains its $29 a share bid, thereby forcing Microcell's hand. Microcell would then have to search for a white knight or begrudgingly accept Telus' entreaties. The wildcard could be Craig McCaw, who is launching a national fixed wireless network in the U.S. McCaw also has a stake in a fixed wireless initiative in Canada through Microcell's participation in a joint venture with Allstream and N2 Communications. It could be that McCaw will do a deal with Microcell or talk to Telus about splitting off the fixed wireless entity. Despite Microcell's claims it has been talking with other bidders, the reality is CEO Andre Tremblay appears to have come up short in his efforts to keep the company independent.
The 2004 Canadian Telecom Summit lived up to lofty expectations as the who's who gathered in Toronto last week at a time when the industry is poised to go through massive changes.
The highlight was Cisco's John Chambers' statement his company would be interested in a partnership with Nortel. It is tough to tell whether Chambers was ambushed during a post-keynote speech by the ROB-TV's Michael Vaughan or whether the politically-savvy Chambers saw an opportunity to deliver a very public message to Nortel CEO Bill Owens. Chambers controls the agenda and given he did met with Owens at the conference, you have to believe Chambers was well aware of what he was doing. Still, it made for great theatre.
As for the show itself, there was a heavy regulatory theme – not surprisingly given the uncertainty about how the Canadian Radio-television and Telecommunications Commission is dithering about whether or not to regulate VOIP. Telus CEO Darren Entwistle launched a rocket across the bow of the CRTC by demanding it change its ways. His speech, he later protested, was not an attack but constructuve criticism because it also included “pragmatic” recommendations”. Call it what you want, Mr. Entwistle but you have have joined BCE Inc.'s Michael Sabia in the pound as an attack dog.
Another interesting development was Allstream COO John Macdonald talking about his company's willingness to do business with cable companies. This took place a day after he vehemently denied a story I wrote in the Financial Post that Rogers was in talks with Allstream about rolling out local telephone service. At first, I thought I had misinterpreted comments by an Allstream executive but now I think there's something there given the enthusiasm of their objections.
By Mark Evans
National Post, June 17, 2004
It was nice to see Bill Owens, Nortel Networks Corp.'s newly minted chief executive, give a keynote speech yesterday at the 2004 Canadian Telecom Summit in Toronto. Given Nortel's accounting, regulatory and, possibly, criminal woes, Mr. Owens deserves credit for stepping up the plate to talk publicly about one of Canada's most-followed companies. But what about the senior Nortel executives Frank Dunn, Doug Beatty and Michael Gollogly, who were placed on paid leave in March and fired “for cause” six weeks later? In the past three months, they have been publicly skewered amid speculation they cooked the books to jump-start a lucrative bonus program or, at least, failed to provide adequate supervision of Nortel's financial systems. Amid all the talk about Nortel having to restate its financial statements since 2000, the company has been silent about Mr. Dunn, Mr. Beatty and Mr. Gollogly. Why were they terminated “for cause”? Did they engage in fraud? Were they negligent in their duties? Did they violate securities regulations? If Nortel knows anything, they are not letting the world know about it. This is unfair to Mr. Dunn, Mr. Beatty and Mr. Gollogly. Their personal and professional reputations are in tatters and it could be a challenge for them to find new jobs For all anybody knows, they have done nothing wrong other than failing to ensure Nortel had the proper financial systems to run a US$10-billion a year enterprise. If this is the case, Nortel has let the three executives blow in the wind for the past three months. By all accounts, Mr. Dunn, Mr. Beatty and Mr. Gollogly are hard-working, good-intentioned people who worked at Nortel for a long time. While prickly, demanding and short tempered, Mr. Dunn did a commendable job reviving Nortel after it imploded during the telecom industry's downturn. Upon replacing John Roth as CEO in late 2001, Mr. Dunn did the grunt work by closing or selling plants, laying off thousands of employees and selling non-core assets. Mr. Beatty, who had worked with Mr. Dunn for many years, is known as a honest, straight-up individual. What did these executives do wrong? What kind of egregious decisions did they make that would prompt Nortel's board to cast them adrift? This is a management team that admitted last October its financial statements had errors they were trying to correct. They did not try to pull of a WorldCom-like magic trick by attempting to hide accounting problems. For the most part, the market accepted this explanation. It was not until the trio were placed on paid leave in March that anyone started to panic. If Mr. Dunn, Mr. Beatty and Mr. Gollogly did something illegal or terribly wrong, Nortel should come clean soon. Sure, there are investigations being conducted by an independent audit committee, the Ontario Securities Commission and the U.S. Securities and Exchange Commission but Nortel should provide investors with some information about its decision to fire them. It should be made perfectly clear when Nortel cut loose Mr. Dunn, Mr. Beatty and Mr. Gollogly, they left them to their own financial devices. They no longer, for example, have corporate indemnification from class-action lawsuits. They are going to have to spend their own money — and probably plenty of it — to defend themselves legally. In the absence of Nortel's silence and the mystery surrounding what Mr. Dunn, Mr. Beatty and Mr. Gollogly did or did not do, here is a theory for you: the board of directors is trying to make scapegoats of the former executives to protect their own backsides. The independent review is taking so much time to complete perhaps because they don't have enough evidence yet to show evidence of “cause” in the termination of Mr. Dunn, Mr. Beatty and Mr. Gollogly. It is about time the actions of Nortel's board, which includes Mr. Owens, started to be more carefully scrutinized. It is this group of people who approved the executive and employee bonus packages that have become so controversial. These are the people who are charged with protecting investors. Where have they been for the past four years? What were they doing during the telecom boom when Mr. Roth was making multi-billion dollar acquisitions of companies with barely any technology and no revenue. What was the board's audit committee doing when it looked at Nortel's books? Why is no one looking at the board and suggesting perhaps some of them be fired as well? Until it is disclosed what Mr. Dunn, Mr. Beatty and Mr. Gollogly did, it is impossible to know whether the books were cooked or whether systemic problems existed that no senior executive could have known about and/or corrected. Maybe Mr. Dunn, Mr. Beatty and Mr. Gollogly are guilty of breaking securities regulations or criminal laws. Then again, maybe not. If these guys are innocent, Nortel is leaving itself wide open for huge wrongful dismissal suits. This may explain why Mr. Dunn, Mr. Beatty and Mr. Gollogly have declined to comment on what has gone down.