Zafirovski leaves Nortel’s remains to others

Three months shy of his fourth anniversary as president and CEO of the company he was hired to revitalize, Mike Zafirovski has left Nortel Networks Corp. as it moves closer to disappearing.

He tried to leave on a high point, with the issuing today of second quarter results that showed revenue has increased 14 per cent over the first quarter and more than US$2 billion in the bank.

However, the fact that a company that was once Canada’s IT leader is being dismantled can’t be papered over. Despite the good news in revenue, Nortel suffered a $274 million net loss in the quarter, including a reorganization cost of $130 million.

Not only is the manufacturing business being taken apart, with asset auctionsstill needing final court approval, divisions will report not to a CEO but to chief restructuring officer Pavi Binning.

A core corporate group, to be held by former company treasurer John Doolittle, is being established to be responsible for the management of ongoing restructuring activities during the sales process as well as post business dispositions.

They will report to a board of directors that has been slashed from nine to three members.

Also, in Canada a judge will be asked to give Ernst & Young Inc., the company’s court-appointed monitor, power to take on an enhanced role in the oversight of the business, sales processes and other restructuring activities, while in the U.S. Nortel is trying to find a principal officer for the Nortel companies in U.S. Chapter 11 proceedings there to work with the U.S. Creditors’ Committee and a bondholders’ group.

With the disposal of assets well under way — Ericsson has won a court-supervised auction to buy its CDMA carrier wireless business and its next-generation LTE unit for $1.1 billion, while Avaya has set the floor for an upcoming auction of Nortel’s enterprise division with a bid of $475 million — Zafirovski felt there was no need to stay. So far, there have been no deals for Nortel’s metro Ethernet division, or its half of the LG-Nortel unified communications joint venture.

Zafirovksi’s departure raises only one question: Could he have done a better job, or was he handed an anchor when he became CEO in November, 2005?

Industry analysts acknowledged he was given an enormous burden when he signed on, a few years after Nortel admitted its financial statements had to be restated for several years.

But they were also unsparing in their criticism of how a once proud company ended up, as one of them put it, as “a yard sale.”

“If results are an indication of performance, you’d have to give him a failing grade,” said Zeus Kerravala, senior vice-president of enterprise research for the Yankee Group. “You could argue that back then [when Zafirovski joined Nortel] they were struggling, but they were still one of the marquee communications companies – certainly the Crown jewel of Canadian companies. He made it a collection of parts that are now being sold off.”

In recent years other troubled companies in the sector made moves that – so far – seem to be paying off. For example, Alcatel spun off its Avaya enterprise division and merged with Lucent to become a major telecom supplier – not without its own financial troubles, but one that is still on its feet. Avaya meanwhile, had to be privatized but appears now to be revitalized.

Siemens put its telecom division into a joint venture with Nokia, and Ericsson sold its enterprise division to Concord, Ont.’s Aastra Technologies.

But Zafirovski couldn’t find a buyer – or a satisfactory buyer – until he pushed the company into bankruptcy protection in January.

During his tenure the company had strengths, Kerravala says, including buyers of its big switches in almost every major telecommunications provider in the world. Yet, he complains, it was slow to create new products, didn’t focus on its channel partners for sales or on fully developing its enterprise products.

“I never got the sense [from speaking to Zafirovski] that there was there was an overly large amount of vision there,” said Kerravala. “I think they were looking at a lot of short-term initiatives. There was nothing compelling in our discussions to make me understand why someone would chose Nortel today if they weren’t looking at them already.”

He doesn’t believe Zafirovski was handed “a no-win scenario. I think it was a difficult scenario to win, but they needed a more hard-core operational plan.”

Ron Gruia, a Toronto-based emerging communications analyst at Frost and Sullivan, was also critical of Zafirovski’s inability to dispose of assets earlier as other troubled telecommunications manufacturers had. Selling Nortel’s UMTS division to Alcatel-Lucent was another error, Gruia believes, for it cut the company off from wireless operators using that 3G technology when Nortel began knocking on their doors to upgrade their UMTS systems to its next-generation LTE technology.

Unlike other analysts, Gruia is skeptical about the value of Zafirovksi’s partnership with Microsoft to marry Nortel’s enterprise software with Office Communications Server. While the world is moving to software-based communications software and most markets Microsoft moves into it ends up dominating, Gruia believes the deal merely gave up Nortel’s customer base to a competitor.

On the other hand, Gruia believes Nortel’s board should shoulder a good deal of blame, saying it wasn’t able to push management to explain how its decisions advanced the future of the company.

Kevin Restivo, a senior mobility analyst at IDC Canada, was more sympathetic to Zafirovski’s position. By the time he took over in 2005 the company was in too much trouble, he argued. Management had focused more on making sure the financial statements were right than on products and strategy, leaving Zafirovski a lot of cleaning up to do.

“It would have taken more than a Herculean effort to keep Nortel intact given the competitive situation it was in and the economy,” Restivo said. “However, when you pay a CEO multiple millions then the breakup of the company is never a hope.”

The financials paint a mixed picture of the company and hint at what could have been. Overall revenues for Q2 were down 25 per cent compared to the same period a year ago, in no small part due to the uncertainty in the company’s future because of the bankruptcy protection proceedings. Still, in the teeth of a terrible recession carrier network revenue was up 20 per cent over Q1, enterprise solutions revenue was up 18 per cent and the LG-Nortel joint venture up six per cent.

“While we continue to be impacted by the economic environment and the creditor protection proceedings, we have successfully stabilized the business since filing for creditor protection,” Zafirovski said in his last news release for the company.

“Despite these challenges, our revenue is up quarter over quarter by 14 per cent overall while our corresponding operating costs are down 15 per cent resulting in strong margins. At the same time, our customer service levels remain strong. These operating and customer results are a real tribute to the professionalism and dedication of the Nortel employees and the outstanding support from our customers, partners and suppliers for which I’m deeply appreciative.”

When he arrived at from Motorola after failing to win the top job there, Nortel chairman Harry Pearce said Zafirofski was the man “to take Nortel to the next level” after former U.S. admiral Bill Owens seemingly stabilized the company.

The praise from industry analysts for appointing a technology man after Owens and finance VP Frank Dunn held the top postes was clear. “I think it’s a great move for Nortel,” said Info-Tech Research’s George Goodall. “If you look at what Nortel is doing now and the strength of what they are doing in the CDMA (code-division multiple access) space, and where their revenue strengths are in that space, it’s a pretty natural fit to me,” he said.

Immediately, however, the start was jittery: Motorola sued him for alleged breach of non-competition agreements. Zafirovski reportedly had to pay back Motorola some US$11 million in separation pay, which was covered by Nortel.

The audit mess was supposed to be behind Zafirovski. But it wasn’t. Which meant that all of the good work he oversaw – slashing thousands of jobs, consolidating offices, cutting the number of administrative applications, shaving costs from suppliers – couldn’t resolve the bigger problem of giving Nortel direction.

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