The acquisitions of companies like Qtera and Bay networks did not
bankrupt Nortel Networks, and nor did its investor lawsuit three years
ago. So why should a recession next year bankrupt the Canadian telecom
equipment maker?
A rumour last month that Nortel
was seeking legal advice on a possible bankruptcy was
followed by a UBS
newsletter this week saying the company should consider
seeking creditor protection. Given the history of Nortel over the last
10 years, this begs the question: Why now?
First,
just because you ask your lawyer about something that might happen,
doesn’t mean it’s going to happen. Second, Nortel’s worst days are
probably behind it. That’s not a well-though-out prediction. It means
it’s hard to imagine how 2009 could be as bad for Nortel as the earlier
part of the decade.
A century after it was spun off as a
separate company from Bell Canada, Nortel made money in 1996 and again
in 1997, when it reported net earnings of $829 million on revenues of
$15.5 billion. That’s real profit, not “pro forma” or EBIDTA. But 1997
was when profitability ceased to be a regular occurrence for Nortel. In
1998, Nortel’s revenues went up to $17 billion but it lost $537
million. All figures are in US dollars.
That year, Nortel
bought Bay Networks in 1998 for $9 billion. At the time,
executives predicted the acquisition would boost revenues by US$50
billion by 2002 by cross selling products and integrating Bay’s
products into Nortel’s IP technology.
The company lost money
the next two years as well: $170 million in 1999 and $351 million in
2000. Though the losses were no secret (all figures were taken from
archives of Nortel’s press releases on Canada Newswire), they were the
best kept secret in the investment community, because the share price
soared from $89 in the spring of 1997 to more than $200 in March, 2000.
And this was after a share split in August of 1999, so that represents
a 450 per cent jump in less than three years.
The tech bubble
burst in 2000, Nortel’s stock plummeted and that’s when reporters
finally started reading Nortel’s press releases past the headlines and
figured out the manufacturer was actually reporting losses.
The
financial figures in 2001, when it reported $27 billion in losses,
reflect more on the company’s performance in the previous years, before
the chickens born in the grand expansion came home to roost. In what’s
colloquially known by accountants as a bloodbath, the report for 2001
included nearly $16 billion in restructuring charges and $5 billion in
writing down the value of assets.
Things started getting murky
after CEO John Roth was replaced by Frank Dunn, who was later fired and
has been charged with falsely reporting financial statements.
Nortel
did report a profit in 2003, after redoing financial statements, lost
money in 2004 and 2005 ($247 million and $2.6 billion respectively) and
then made a $28 million profit in 2006.
About three years ago,
it was hit with a lawsuit in which it was ordered to pay $2.47 billion
in damages over false statements. After the board of directors dumped
Dunn, the company was headed by retired Admiral William Owens, who was
forced to focus a lot of his attention on cleaning up the books. Though
Owens had tech experience, he had spent most of his life as a U.S. Navy
officer, and was replaced by Motorola’s Mike Zafirovski.
By the
time Zafirovski came aboard, the previous problems were behind the
company. Not only has it been focusing on products and technology (such
as unified communications), but it is putting its metro Ethernet
division on the auction block, laying off thousands and cutting an
entire division.
This is not to say its previous problems are
easy to fix. During the first nine months of 2008 it had $237 million
in interest charges, and debt payments sucked away a total of $675
million in cash. Its long-term debt is $4.4 billion and it has an
additional $1 billion in pension liabilities.
But even in a
recession, companies will still need to communicate and service
providers will still need to upgrade an replace equipment. Nortel may
be bleeding, but it is nowhere close to cardiac arrest.
