Waiting on NT’s Turnaround

By Mark Evans | Published: December 21, 2007

Looks like 24/7 Wall St. is losing patience with the pace of Nortel’s turnaround efforts.

Nortel “still has a $6 Billion market cap, has somewhere around 33,000 employees (down from over 90,000 workers in the tech bubble), and it still has major strategic partnerships on every continent. It offers close to a full service product and services portfolio. It also has a fairly young management team for a telecom and networking equipment giant. But it has one crummy stock. Recent layoffs are not really able to be enough to make a dent and you wonder just how many plant consolidations can realistically occur. Its balance sheet doesn’t look truly inverted, but the way we analyze liquidity it is far from pretty and far from being in a safe breathing room.”

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  • trivialchange

    One wonders why because looking at the portfolio depth and breadth, Nortel is a bit unique be it wireless, enterprise or optical. Grwoth will likely be flat because:
    1. stagnating revenue
    2. cost reduction focus
    3. too many product lines
    4. political dna
    5. do not rock the boat mentality

    Revenues historically are flat at 10 billion a year. Close to 90% is lost in cost of revenue, r&d and sga. So cash flow to the bank is negligible. Debt is an astounding 4 billion+. There is too much competition and even Alcatel has its woes. So pretty much a has-been fate since financially its a dead end.

    Last decade the focus has been on cost reduction. It had to be done but this is so ingrained. As they say if you do not innovate you are dead. Unless this happens there is only so much you can cost reduce. Heaven help if this comes from more layoffs of good people.

    Product lines number more than 40. not one is in a leadership position or a 1 billion business like major competitors. Also some product lines are cloned between business units. Work is duplicated, some of it being redundnat. An example is the new metro ethernet unit that cloned the entire ethernet product line.

    Too many silos across product, sales, marketing that do not communicate and have their own agendas. Things come and go like a fad with VP groups formed like a rash. Amazing that there is still a lot of fat and how quickly it can move around the company. The quality of people at the lines is really good. Its the management layers in between the cabinet and lines that are a serious problem. Most got their positions for connections, so there is a can do no wrong mentality. Some of the politics would make Capitol Hill ashamed.

    Overall Nortel has some really good bright people across the business but they are quickly becoming a minority. The company is aging with a majority waiting for retirement. So there is a risk averse do not change mentality, the outcome of which can be easily predicted from the risk v/s reward philosophy.

  • losingmoney

    figure this, about 22% is represented below. wet finger salary total exceeds 1 billion. begins to look like an inverted pyramid. so there still is a lot of fat.

    20 CXO, Presidents etc $700,000 min
    100 VP’s (5:1) $400,000 min
    700 Director (7:1) $200,000 min
    5600 Managers (8:1) $150,000 min

  • Casual Observer

    Hmmm…wonder what this means…

    –

    Friday, Dec. 21 2007
    Nortel Commences Registered Exchange Offer for its 10.75% Senior Notes Due 2016 10.125% Senior Notes Due 2013 Floating Rate Senior Notes Due 2011

    TORONTO, ONTARIO, Dec 21, 2007 (MARKET WIRE via COMTEX) — Nortel(i) Networks Limited today announced offers to exchange (1) any and all of the U.S.$450,000,000 outstanding principal amount of 10.75% Senior Notes due 2016 for an equal amount of new 10.75% Senior Notes due 2016, (2) any and all of the U.S.$550,000,000 outstanding principal amount of 10.125% Senior Notes due 2013 for an equal amount of new 10.125% Senior Notes due 2013, and (3) any and all of the U.S.$1,000,000,000 outstanding principal amount of Floating Rate Senior Notes due 2011 for an equal amount of new Floating Rate Senior Notes due 2011. The outstanding notes are, and the new notes will be, fully and unconditionally guaranteed by Nortel Networks Corporation and initially guaranteed by Nortel Networks Inc.

    The terms of the new notes are substantially the same as the original notes, except that the new notes will be registered under the U.S. Securities Act of 1933, as amended, and the new notes have no transfer restrictions, rights to additional interest or registration rights, except for certain restrictions on transfers of new notes in Canada under applicable Canadian securities laws. The new notes have not been, and will not be, qualified for distribution under the securities laws of any province or territory of Canada except pursuant to available exemptions therefrom.

  • Casual Observer

    Just a hunch but I think Nortel will make a major move after the new year. If I were to guess it will be a divestiture or acquisition which will reveal where they are really placing their bets for the future. I would also not rule out a minority stake by private equity or sovereign wealth funds which have slowly been taking stakes in companies with distressed financials. Nortel still needs a pretty major capital infusion or revenue stream in order to become a major player again in the telecom and networking segments.

    Nortel still is a jack of all trades and master of none. Other than optical, there is a lack of leadership in every other segment in which they play.

    Something major needs to be done in early 2008 with a slowing global economy and contracting credit markets.

  • Novice Investor

    Mike Z, sell Nortel to Motorola for “Motel” (put that to bed) and use your cheerleaders at Scotia Capital, Gus Papageorgiou, 416-863-7552 ($34 target as of September 11, 2007) and/or TD Newcrest, Chris Umiastowski, 416-983-3599 ($28 target as of November 7, 2007) to get that done ! If Motorola isn’t interested then they will or find another dance partner !

  • Novice Investor

    Git-R-Done !!

  • Nortel Watcher

    I didn’t know there were that many directorships in Nortel today after the downsizing repeats of the last few years!!…I met one such director, I believe from Marketing, and the salary I was told was indeed just over $200K.

  • Steven

    “… if you do not innovate you are dead. ”

    Oh course. They were completely taken with the idea of hiring foreign born and educated people, but with North American grad school education and letters after their name who would do anything for a job here in N/A. They completely lost out on people with a passion for the work. It became completely career oriented.

    The company’s employment contract states that any patents originated in Nortel belong exclusively to Nortel alone. Unbelievable.

    I’ve know people a decade or two who paid off their homes based on a one or two decent patents.

    Today, if you have an idea that’s actually worth anything, you keep it too yourself on the chance it may pay real money down the road.

  • Nortel Watcher

    Hmmm…someone else likes my handle. Or maybe I liked his. FYI…more than one Nortel Watcher.

  • nortelhand

    All,

    With all the talk of money and jobs. Does anyone on this site know if NT has anything in the bag that will show wallstreet it can make money an improve the stock price? The cost cuts have been done, and we see where that got us. Now we need products. I know a bunch of NT people look at this site. Can we expect any real (stock price) improvements in 2008? If we don’t see improvements someone will buy this pig one way or another.

  • Apple

    Nortelhand
    NT is $15 company now
    Question, why Mike Z did not sell company when stock was around $30? Mike Z used stock to compensate defrauded shareholders to settle the law suit. 14.5% stock calculated at $30.50 a share
    Total settlement supposed to be $2.7 bill

    Answer is in the question as well.
    He could not sell company because all the continued accounting problems, new restatements and unfinished settlements. Is the settlement done and the problem gone? Is it?
    Will he try to sell Nortel at $15 now? Or will he wait longer and we can see pps in single digit levels?
    In the same time competition grew up; Huawei 300% JNPR 100% CSCO 60% as few examples
    They got the new deals, contracts /to grow/
    NT is $10 bill rev company in last 4 years…10% growth? If Nortel did not get bsnl deal and other deals below costs it would be zero % revenue growth!
    And again
    Nortel is not profitable when most of other vendors are profitable..
    Mike has not find a partner to merge or acquire so far ..
    Will he find an acquirer? Is BK the only choice for shareholders?

    I wish NT shareholders all the best but I am prepared for the worst.

  • Nortel watcher

    Good points Apple..by the way, if pps hits single digits, then Nortel is a penny-stock once again on a prereverse split basis..

    to the other Nortel Watcher, I had this handle before, I just took a vacation during November, but don’t mind sharing it..

  • X-NT

    I agree with all your points. One of the other reasons there is no innovation is lack of budget to make the changes needed to implement any changes. Nortel is ill but can afford the healthcare needed to get better. Not a great place to be like so many in the USA without healthcare.

  • Former Nortel

    Very well said trivialchange but I think it is almost too late for Nortel because if they are not getting laid off the smart ones are leaving because of the extreme stress that was the main reason I left not that I did not like the job but I hated what the company had become and what it was doing to me.

  • jayemmay

    The way the stock price is behaving suggests to me that Nortel is in a death spiral.

    If there were any good news about the company or any realistic hopes for the company, the stock price would not continue to fall.

  • http://deleted Nortel Watcher

    It will be interesting to see what if any outlook is given for 2008. I expect to hear ‘reduced revenue and flat earnings’. That’s the usual result of zero growth and tightening the screws on cost. There will also likely be some jibber jabber about a bright future based on 4G and hyperconnectivity. Right.

  • trivialchange

    death spiral is right. i plan to leave. cuts next quarter so hope to get a check.

    Ironically I like Nortel but it is time to go because like many I am just fed up.

  • Former Nortel

    Trivalchange, Good luck and hope you get a package when I left in March they were laying off but because of my Succession skills they would not give me a package but rather tell me how hard it was to get another job. One phone call and I had another job so it never felt so good to say I QUIT. It is a real pleasure to come home at night and not think about the job but just relax it is almost a culture shock. I don’t think you will regret leaving I know I don’t but I do miss some of the people I worked with and feel for them.

  • whatever

    I truly enjoyed working at NT. Unfortunately after 7 years there I’m back to doing what I did when I started out, with what have turned out to be no marketable skills.
    Local job fairs have long been swamped with ex-Nortellains who can no longer convince prospective employers that they weren’t at least in part to blame for NTs demise.

  • Nortel watcher

    to whatever,

    I don’t see how prospective employers can make the connection between bad decisions made in M&A activities + fraudulent accounting practices and a company’s rank and file…those missteps are clearly the outcome of C-level decision-makers like Frank Dunn and, collectively, did enough damage to bring Nortel to its knees slashing payroll and selling off assets.

    I would find it more credible if you had commented on how ex-Nortelians are having difficulty finding similar compensation.

  • http://none Mark

    I tend to believe that Nortel was the Ace in R and D, I assume that after 3G thereis something in the works already for the next technology that will emmerge in the next 10 years .
    I would find it hard to believe that , Nortel cant survivr , simply because its Nortel. Bell Canada should buy it back haha. Though why would that be such a bad idea.

    I would like to know what is the future .. Once 3G is fully deployed and sustainable,.. what is the next technology, and does Nortel have this figured out yet ?

  • Edward

    Trivial…what cuts are coming up next quarter?
    Numbers?
    Departments?
    Whatever ..how do you spend 7 years at nortel
    and come out with no marketable skills?
    I guess you were not much of a contributor?
    What are the packages like over there now?
    From what I was told by a buddy
    NT is hiring quite a few engineers but they start off with a low salary.
    I would hazard to say the employees receiving
    the lower wages will be the ones they will keep providing they are flexible and have demonstrated they are capable of working beyond
    their expectations.
    That would be the sensible thing to do.
    Nortel must keep the people who work in the labs, the innovators and the ones who work with
    the customers, whether that be through support, manufacturing or sales. Cut out the deadwood now. Get rid of useless middle management, admin, SG and A, along with designers or engineers who are not designing or engineering anymore. If they look at the employees on an individual basis, there is alot to be gained.
    If not..the company will eventally flush itself into oblvion.
    I would think it is smarter than that?

  • whatever

    You can’t blame wanton spending on the top brass alone.

    I came to Nortel in ’99 as a contractor with zero telecom experience whatsoever. They needed bodies badly, so I indulged, and gleefully so. Within a year I was hired on @ $23/hr, working up to 70 hr/wk.

    R&D was bursting at the seams. You’d run a daily gauntlet of vendors and sales reps dispensing all kinds of freebies like stress balls and key fobs; you could get Nortel discounts at myriad eateries and bars in the area. Cube neighbors were kicking back, perusing office supply catalogs, ordering color-coordinated staplers and hole punches, even watching doggie porn. Heady times they were.

    Management determined all and any square foot of lab space was too precious to waste on storage, so Nortel disposed of untold $$$ of hardware and sundries like copper, literally, in the trash.

    Quite a few coworkers laughingly quit to earn much more at startups sprouting up everywhere. I got my first and only raise.

    Then came 2001.

    Suddenly there was no more budget for “career building”. Mandatory Priorities meetings became a waste of time. I took 21 free Global Knowledge classes, mostly out of curiosity, while I scavenged, recycled and scrounged ceaselessly to keep the machine going. I probably saved Nortel in excess of $30k in self-taught Passport repairs. Of course, none of these “contributions” never made it to paper.

    When I returned my laptop the IT guy and I got to talking about corporate waste. He said he’d recently found an entire room with some $300k of unclaimed equipment blinking away in the dark for x amount of years.

    This low contributor was offered to return to work as a contractor at the same wage, but I decided to do the job fair route circuit first.
    They were like weekly class reunions. Buncha Nortel people looking for jobs. I can’t say if employers had gotten leery of Nortel talent, or if we were too expensive, but most of them didn’t much care for the 21 free Nortel courses I’d passed.
    “DMS, eh? UMTS. Cool. You know some Passport, too… Got anything in Cisco? Hey, you can travel around and run cable for us.”

    And what might you find hidden under the lab floor or on the loading dock these days thats not been shipped to China or India? 1000 ft of unused cable bought in ’98, long-obsolete RF cards never opened, (12) 15″ monitors MIB on a skid from ’97.

    Nortel has shed some weight.

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