The four faces of Nortel’s descent

It’s over. Yes, there are court hearings, and restructuring negotiations and yet more layoffs ahead, but all of that is epilogue. Nortel Networks is in bankruptcy, and for the millions of Canadians who went along for the nauseating ride, it’s over.

When the news landed last week, it didn’t exactly qualify as a shock. Recessions cull the weakest from the herd first, and it’s been clear for some time that Nortel was sickly and lame. For the past five years, the company has made news for only three reasons: management turmoil (four CEOs in eight years); firing workers (approximately 65,000 jobs cut since 2001); and accounting scandals (five plus nine equals . . . what again?). But for the thousands who’ve already lost their jobs, the many more who surely will, the shareholders whose savings were vaporized bit-by-bit, and the universities that rely on research funding from the company, the anticipation did little to cushion the blow.

At its peak, Nortel represented more than a third of the value of Canada’s benchmark stock index, but that doesn’t begin to describe the place it held in our collective psyche. It was never just a company, and it was never just a stock. In its ascent, it represented an all-too-rare international success story, and was a shining symbol of the modernization of Canadian industry. Finland had Nokia, Sweden had Ericsson, and Canada had Nortel. When things went bad, it quickly became an even more potent symbol. Just as Bre-X has become a cultural touchstone for corporate fraud in this country, Nortel has become an icon of our irrational exuberance, and its devastating aftermath.

Naturally, people will look for the culprit, the mistake, the loose thread that began the unravelling—but they’ll be looking in vain. Nortel’s downfall can only be understood as the culmination of four broad forces, neatly represented by its four CEOs since 2000.

First, there was John Roth, who was named Canada’s CEO of the Year by a Bay Street panel in the fall of 2000, not long after Nortel’s stock hit its peak of $124 a share. A week after receiving the award, he turned in the first major dissapointment of his tenure: quarterly earnings fell short of analysts’ expetations, sparking a  25 per cent plunge in the stock price in a single day. Roth scrambled to assure the public that Nortel’s growth machine was still intact, and in December he forecast a 30 per cent rise in sales. Just 60 days later, he cut that growth forecast in half, and announced plans to fire 10,000 workers. We didn’t know it then, but Roth’s Valentine’s Day massacre was the beginning of the end. Within the year, Roth would retire, walking away with an estimated haul of $139 million in salary and stock options. Thanks to his mammoth personal windfall, the Roth era will always be associated with greed.

Next came Frank Dunn, Roth’s trusted CFO, who was hailed as the man to return financial discipline to a company that had grown unwieldy. He led the company for 2½ years, during which the stock fell by half. He was fired for cause in April 2004, amid allegations that he had helped orchestrate a massive accounting fraud aimed at inflating profits. He still faces charges in both Canada and the U.S., and he has denied any wrongdoing. But unless and until he is acquitted, he remains a living symbol of the mendacity and deceit that fuelled Nortel’s crash and burn.

Nortel had gone from a misadventure to a full-blown scandal by the time the company’s board turned to Bill Owens, the ex-Navy admiral and former vice-chairman of the U.S. Joint Chiefs of Staff. The appointment was all about re-establishing trust and credibility, and it fell short on both counts. Owens’ integrity was unquestioned, but he had never run a company the size and complexity of Nortel. His reign was marked by defections among top executives, and in just 18 months he presided over a 30 per cent decline in the stock. By then, most observers had concluded that incompetence was the real problem at Nortel, and Owens could do nothing to change that perception. That’s when Nortel turned to Mike Zafirovski.

Zafirovski was a star hired away from Motorola, at enormous expense, and with much fanfare. He was seen as a technological whiz and a turnaround expert. But his tenure has been marked by deteriorating results, thousands more layoffs, and the spiralling destruction of the last remains of Nortel’s equity value. It wasn’t all his fault, of course. The market was changing fast; there was lingering mistrust from the accounting debacle; the company’s debt was a millstone around his neck. It’s not easy to read a map while hurtling down the highway in a car that’s on fire. It may well have been an impossible task, but we’ll never know. All we know is that Zafirovski was in a desperate race from the beginning, and he lost.

Greed, deceit, incompetence and desperation—you can organize Nortel’s many mistakes and misfortunes under those four headings. But we shouldn’t forget the role we all played in this tragicomedy. When Nortel was at its peak, a beleaguered fund manager complained to me that investors had gone crazy with Nortel fever. “This valuation suggests in the future there will be no grocery stores, no gas stations, just Nortel stores on every street corner.” But nobody wanted to hear that. Fund managers who avoided the stock were attacked by clients, ridiculed by rivals and often found themselves out of work. All the way down, even as Nortel shed workers, shut down business units and profits ebbed, people would ask: “When should I get back in to Nortel?” It was never “if,” only “when.” Nortel fever was a difficult bug to cure.

Zafirovski says Nortel will live on, in one form or another, and it probably will. But the Nortel we loved, then loathed and still mourn? That Nortel is gone. It left us a little wiser, significantly more cynical, and of course a whole lot poorer.