NORTEL: Canada's Enron

Is there anyone working at Nortel anymore?

At one time Canadian Telecom giant Nortel had over 100,000 employees, by last year it had cut its workerforce again leaving the company with 30,000 workers. In a decade it has laid off over 70,000 workers. Its cuts to staff have affected its North American manufacturing and R&D operations, while leaving its offshore operations untouched.

It is Canada's version of Enron, it fired seven executives last year after the company faced criminal charges over allegations that they had been cooking the books about Nortels profitability. Nortel has refused to release its books to shareholders for the past three years in a massive cover up, as it's stock continues to crash and burn.

It has been laying off workers since 1995, as it got caught up in Schumpeters famous "Creative Destruction" cycle of; downsize in North America and expand to cheap labour markets like China.

And then thanks to the dot.com crash in 2001 it hit the Wall. Nortel fired one third of its workforce in 2001. It has changed its CEO and CFO who cooked its books to appear profitable in the marketplace. Ain't capitalism wonderful.

And now it is February 2005 and Nortel is again announcing yet another deadline, some time this April, to release its bookeeping and accounting information. Promises, promises, Nortel still has nothing to tell.

Nortel to release 2004 annual results by end of April
Last Updated Mon, 28 Feb 2005 18:41:13 EST
CBC News

BRAMPTON, ONTARIO - Nortel will release its delayed 2004 annual results by the end of April, the company said late Monday.

As part of its bi-weekly status update, Nortel also said it would file its unaudited third-quarter financial statements by the end of March.

Nortel also announced it ended 2004 with $3.7 billion US in cash.

The company is also planning to ask for court permission to push back its annual shareholders' meeting for both the 2003 and 2004 years by a month until June 30 at the latest.

The release of the company's results has been repeatedly delayed while it launched a major accounting review.

The accounting review led to the dismissal of several executives, including former chief executive Frank Dunn, who was replaced by current CEO Bill Owens.

On Jan. 11, Nortel released its delayed results for 2003, restating its profit to $434 million US from the initially-reported $732 million US. The company also restated results for 2002 and 2001.

In early February, it released results for the first two quarters of 2004, saying it made $75 million US in the first six months of the year.

Nortel shares closed Monday at a 52-week low of $3.26 on the TSX, down 21 cents.

The Fall of the Nortel House of Cards, 2004

Last year Nortel hosted a meeting for market analysists, and cheerfully predicted it was making a profit, despite evidence to the contrary. And it still had not called a sharholders meeting, or released any real bookkeeping or Accounting details. The CEO and CFO who called the conference were replaced by Nortel as word of its accounting scandal was made public.


Editorials
The new Nortel looks to a bright future
By John Dix
Network World, 02/23/04

Nortel hosted its annual analysts meeting last week in Boston to review what President and CEO Frank Dunn called tremendous 2003 results and to extol the company's position in its key markets.

While we weren't invited to the general morning session, we had the opportunity to meet with Dunn and many of his top lieutenants. To a person they were brimming with enthusiasm about future prospects.

All of which might seem strange given Nortel finished 2003 with sales of $9.8 billion, down 7% compared with 2002. But considering the recent past, that amounts to a great stabilization. Nortel sales crested in 2000 when the company topped the $30 billion mark, and then plummeted 37% in 2001 and another 40% in 2002. Seven percent is a relative dip.

Dunn says of last year the whole market was down and points to fourth-quarter sequential growth of 25% as a sign that Nortel is on the right track. "Business momentum is up," he says. "Progress is about all the things we've done. All the contracts we've signed. We're taking share. It will take time for our gains to be reflected in the numbers."

The company has been fundamentally overhauled. Two out of three employees are gone and Nortel is currently finalizing a contract that will result in it exiting the manufacturing business all together. In the new company, one out of every three employees is in research and development.

By August of last year, the sh** hit the fan and Nortel once again used its tried and true way of dealing with its fiscal crisis and criminal investigation, wait for it.....Lay offs.

"Nortel Networks Corp., the focus of criminal and regulatory accounting probes as it prepares to restate several years of financial results, issued a long statement Thursday in which it released results for the first half of the year; announced that it had cut 3,500 jobs, or 10 percent of its workforce; and reported new measures to enhance corporate governance and ethics.

The layoffs included the “termination for cause of seven finance executives.” according to the company announcement. " CFO Magazine, August 204
Nortel restructures, cuts 3,500 more employees
Has also fired seven more execs due to financial problems reported in March

By Robert Keenan, TechBuilder.org
Thu. Aug. 19, 2004

In an announcement Thursday (Aug. 19), the Ottawa-based company released new details into its restated first and second quarter earnings for 2004. It also announced plans to restructure into two operations and cut an additional 3,500 employees from its worldwide work force.

Nortel has retrenched on the financial front since announcing accounting irregularities in March. They led to the ouster of three executives, including the company's CEO and chief financial officer. Seven other executives have since been fired due to the financial problems reported in March, said William Owens, president and CEO of Nortel.

"We have terminated with cause seven business unit execs with financial responsibility," Owens said Thursday. "We will seek to reap the bonuses handed out to the 10 executives that were terminated," he added.

Earlier financial problems have also forced Nortel to restate its 2003 results and first and second quarter results for 2004. According to Owens, the company saw an approximately 50-percent reduction in 2003 net earnings. The company also reported unaudited revenue totals of $2.5 million for the first quarter of 2004 and $2.6 million for the second quarter of 2004. In both quarters, wireless network sales accounted for 51 percent of revenues
More layoffs are also expected. In today's announcement, Nortel said it would cut an additional 3,500 workers worldwide. Coupled with the 2,500 employees being shipped to Flextronics in an outsourcing deal announced in July, Nortel's total employee count will drop from 36,000 to 30,000 employees worldwide. In its heyday, Nortel had approximately 100,000 employees.

Owens said North America will be the hardest hit by the reductions, with few changes coming in markets like China, the rest of Asia and Latin America.
Nortel's layoffs could yield between $450 million and $500 million in spending reductions, thus allowing it to reduce its operational expenses to under 35 percent of its total by the end of 2005.

Nortel's latest financial results are based on unaudited figures and, according to the company, are subject to change. Nortel expects to complete its financial restatement process by the end of September.


Nortel's Annus Horribilus

Nortel's Crash and Burn Began in 2001 and it has been cooking the books ever since, and laying off workers, to make up for its shortfalls. But a revolving door of CEO's and CFO's was about to begin, with golden hankshakes for some and trinkle down economics of golden showers for the rest of the workers.

Nortel layoffs, losses have industry asking: What's next?
By Jim Duffy, Tim Greene and Phil Hochmuth
Network World, 10/08/01
MISSISSAUGA, ONTARIO - When Nortel is finished with its latest round of layoffs, divestitures, facility closings and management shakeups, the vendor will hardly resemble the company that it once was.
Nortel, which last week announced plans to fire up to 20,000 more people, shutter more "noncore" operations and replace its CEO with its CFO, is streamlining its business again after warning of another multibillion-dollar quarterly loss. It will now focus on three areas - long-haul optical, metropolitan and wireless networks - instead of the five it targeted just three months ago. Two IP-related areas having been dropped from the ranks.

The Globe and Mail reported at the time:

"With 10,000 layoffs announced for the global work force of Brampton, Ont.-based Nortel Networks Corp., there is plenty of talent on the loose.

With competitors closing in, recruitment specialists following the Nortel situation say the company's major challenge is to retain the top-level employees it wants to keep. Mr. Moore says he will not raid -- he is looking for free agents. Others will not be as gentlemanly.

Alan Kearns co-founder of TalentLab.com, a high-tech search firm based in Kanata, Ont., says fallout from the layoffs -- especially Nortel's falling stock price -- could have serious implications for the key employees it needs to hold.

"There are a number of people with stock options that were worth a whole lot of money six months ago and now they are not," Mr. Kearns says. "They are asking 'Why should I stay here? My golden handcuffs are no longer.'

"So far, Nortel has not come up with a good response."

In a speech to the Canadian Club in Toronto Monday, Nortel chief executive officer John Roth made little reference to the impact of Nortel's "work force correction" on employees, except to note that his company wanted to avoid the exodus of key talent suffered by rival Lucent Technologies Inc.

An aggressive recruiter in boom times, Nortel has long prided itself on being an "employer of choice," providing healthy pay, flex time and top-of-the-line perks. The company is tight-lipped about its severance packages and is equally reluctant to discuss how it will retain, and selectively hire, the employees it still needs to be a world-leading company."

As CAW Economist Jim Stafford wrote:

New Economy, Same Old Pink Slips
When the going gets tough, the bosses look after themselves

Now it is announced that Nortel Networks is laying off 30,000 workers, one-third of its workforce. These displaced computer nerds and internet wizards are learning a hard lesson. They may work in the new economy, but their lay-off notices come in the same colour: pink.

Apparently it doesn't matter how smart you are, or how up-to-date your "human capital." Whether you work in the new economy or the old economy, you stand a good chance of being shown the exit when your employer's bottom line starts to bleed. What new skills will the career counselors suggest for the laid-off Nortel workers? I thought they had the new skills.

To be sure, there are some important differences between the layoffs at Nortel and those at General Motors. The Nortel workers got canned a lot quicker. And since most were not union members, their severance packages were a lot stingier. So much being ahead of the knowledge curve.

But for the most part, the Nortel layoffs reinforce my long-standing suspicion that the "new economy" looks a lot like the "old economy."

For example, both old-economy and new-economy firms can lose incredible amounts of money. Nortel is warning of an incredible $19.2 billion (U.S.) loss for its second quarter. That's one of the worst quarterly losses in corporate history (world corporate history, not Canadian corporate history). Coincidentally, only General Motors ever lost more in a single three-month period, with its $21 billion (U.S.) write-down in the first quarter of 1992.

Meanwhile, Nortel employees--like the GM workers before them--are finding out that when the going gets tough, the bosses look after themselves. Nortel CEO John Roth topped last week's Report on Business survey of Canadian executive compensation, taking home a cool $71 million in 2000. His company, meanwhile, placed dead last in RoB's list of the most profitable Canadian companies, posting a $3 billion loss. (That's a lot of red ink, but it's small change compared to the gargantuan loss Nortel will book this year.)

To be sure, much of Roth's compensation last year consisted of stock option gains, and any Nortel shares that Roth subsequently kept are now worth a fraction of their former value. Nevertheless, even as Nortel crashed and burned, Roth took home enough old-fashioned money--the kind printed by the Mint, not by Nortel's treasury--to keep him in good plonck for his golden years. Roth made $20 million in cash salary and bonuses over the past 3 years. Unlike his 30,000 laid-off workers, he's not losing sleep over how to pay the mortgage.

In their commitment to looking after their own, Nortel's executives are carrying on a long and honourable tradition pioneered years ago by old-economy companies. Indeed, perhaps the biggest difference is merely the extravagance with which new-economy executives are rewarded, even as workers lose their jobs and shareholders lose hundreds of billions of dollars. For instance, former GM CEO Robert Stempel took home a mere $3 million (U.S.) in cash salary and bonuses in the 3 years prior to his forced 1992 retirement. So despite the dot-com meltdown, perhaps microchips are still better than cars--for senior executives, anyway.

Meanwhile, compared to the bleak 1990s, GM now looks like a veritable hot prospect. Its shares are up 20 percent so far this year, a breath of old-economy fresh air for stock markets staggered by the high-tech meltdown. It was if once the company hit bottom in 1992, it had nowhere to go but up.

Perhaps this same principle can give hope to Nortel's beleaguered shareholders. The worst is surely behind them. And think of what could happen on the way back up. Indeed, a newly-discovered mathematical theorem--we might call it "Roth's Law"--proves that reported percentage changes look bigger when something is growing, than when it is shrinking. Nortel shares have lost 90 percent of their value, falling from $125 to $13. Suppose they now bounce back to $26. (Some might call this the "dead cat" bounce.) That's a 100 percent gain. Sure, you're still out by almost $100 a share. But a gain of 100 percent, after a loss of only 90 percent, might make you feel better.

And if you believe that, I've got some shares in an Indonesian gold mine that might interest you.

Facts from the Fringe #39
by Jim Stanford
July 2, 2001

Past editions of Facts from the Fringe.
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