Speculating about the future of Canadian institution Nortel Networks is becoming something of a national pastime.
These days, when Nortel captures media attention the news always seems bad. Everybody wonders whether things can get worse and where will the company end up. Things really heated up in early September when former Nortel CEO John Roth cashed in on his remaining 700,000-plus stock options for about $1.55 per share, pocketing what for Roth was a meagre $1.16 million.
That action surely led many beleaguered Nortel shareholders to wonder whether John knows something they don’t. For Roth to shed his remaining options, probably at tremendous personal loss (well, he did pocket US$135 million from a similar stock sale a couple of years ago) lends speculation that Roth probably does not hold much hope that better days are coming for Canada’s once proud and prestigious networking giant.
Well, Roth isn’t alone. Many Nortel stockholders also think the end is near.
As mentioned, there’s never much good news that comes out of the corporate confines of Nortel. Consider the company’s most recent announcement of another 7,000 layoffs announced in late August with little indication of where or how they would be carried out, and even less detail about where the company is headed as a result of the move. Nortel’s traditional base of U.S.-based telecoms continues to tighten budgets, particularly in product areas of the company’s core technological strength: Internet and wireless.
In announcing its layoffs, Nortel also downgraded revenue expectations for the coming quarter – from a target of about US$3.2 billion to a “break-even point” of US$2.6 billion.
So speculation runs rampant about the future – if there is one. What’s in store for Nortel? Recovery? Takeover? Complete and utter failure? The truth is that if one lesson has been learned through the utter collapse of the network equipment market during the past two years, it is that anything is possible. So consider these three possible Nortel fates:
Acquisition
Say what? No one is in a buying mood these days and for good reason. Who today is in a position to spend billions for 35,000 employees and a set of products in a stagnant market? The most oft-heard rumour in September was of an impending sale of Nortel to arch-nemesis Cisco Systems. Cisco CEO John Chambers is more likely to move his entire family to Brampton before such a deal is consummated.
While having the wherewithal to consummate such a deal, Cisco wouldn’t even consider it these days. The company is working at full steam just to survive the current IT drought and surely has no designs on doubling its workforce by taking on a company that still can’t break even.
Some have argued that, by acquiring Nortel, Cisco might gain strong product sets in wireless and fibre optic solutions. In fact, both product markets are dormant right now and Cisco likely has enough time to improve its portfolios in both areas through a combination of internal efforts and smaller corporate acquisitions before significant market recovery occurs. Why spend billions now – or ever?
Also, Nortel just isn’t the sort of company that Cisco is apt to purchase. Cisco’s history of acquisition has focused on the purchase of smaller startups, not for products, but rather for the people within those companies who were quickly shuffled into senior-level Cisco positions.
Only once did Cisco make a blockbuster, spending billions for Asynchronous Transfer Mode company StrataCom, back in the early ’90s – a deal that ranks among the company’s first and worst deals. Only the greatest of optimists at Cisco would reflect upon the StrataCom purchase as anything close to a marginal success. Also, high-tech history shows that rarely do mega mergers and acquisitions in IT achieve the promise that is expected.
Acquiring Nortel makes little sense for Cisco and is even less logical for other network equipment makers like Lucent, Siemens, Ericsson or Alcatel. That’s assuming none of these aforementioned companies has a death wish.
Failure
Most red-blooded Canadians have trouble believing there may be an end for Nortel. It seems unimaginable. There are a great many Nortel boosters in this country, not the least of which would include the federal government itself, who would surely step in to save the company if a collapse seemed imminent. Canadians are rooting for Nortel, including many who once worked for the company, particularly those who were long-term employees, and ended up suffering the fate of downsizing and the disastrous stock decline. Even they still have a soft spot for Canada’s IT pioneer.
Many speak fondly of their time and experiences at Nortel, remembering it as a terrific place to work, and they still express hope and confidence that the company can recover. Although Nortel has the appearance of a failing company, the possibility of complete failure seems unlikely. Surely Canadians won’t let that happen.
Recovery
Why not? OK, so times in the network equipment space will continue to be difficult for the next year or so, but things are tough all over and the grief can’t last forever. The question is, can Nortel endure until recovery happens, particularly in the telecom industry?
CEO Frank Dunn appears to be the right man for the job, having made sound reorganizational moves to define three key business areas: wireless, optical networks and enterprise/metro networks. The company’s $20 billion, three-year spending spree from 1997 to 2000 appears to have taught it an expensive but important lesson: that you can’t be all things to all people and must instead focus on select product spaces where you have superior technology and market strength.
Despite the continued paring of its workforce – hopefully we’ve seen the last of massive layoffs – and weakening revenues, Nortel has the appearance of a company that has gone back to its roots. It has become more like the conservation operation it once was, much less concerned with dominating the networking world and more practically focused on strong execution and retrenchment. That would seem to be a strong base from which to move forward.
