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Did Nortel Fall Victim to Ivory Tower Syndrome?

The breakup of Nortel is very sad not only for its employees and shareholders, but for the industry at large. Its market capitalization at one time reached a high of about $250 billion and it had more than 90,000 employees across the globe. Today its stock is no longer being traded on the Toronto Stock Exchange (TSX) and it is being forced to sell off its assets for a fraction of what they were valued at one or two years ago. Many reasons for Nortel's fall have been cited in recent articles. Among the internal problems were an archaic accounting system and spreading R&D expenditures too thin across too many product/technology areas. External issues included the rise of Cisco Systems as a strategic competitor in the enterprise communications and network carrier markets, the growth of wireless competitors such as Alcatel-Lucent and Ericsson through acquisitions, and a fundamental paradigm shift of technology standards. Another reason cited was the belief inside Nortel that its product technology and market position was sufficient to maintain growth and value the company far greater than its reality. At one time Nortel was the largest telecommunications equipment supplier, but its revenues have shrunk considerably and it can no longer compete against companies several times its size across several product market sectors.

The fast growing company of the late 1990s went on a multibillion dollar spending spree when its stock was riding high, but when the Internet bubble burst Nortel was hit hard and never full recovered. Too many Nortel executives continued to believe that the company was still operating in good times, but Nortel's roots in the wireline switching business coupled with too many ill-fated acquisitions were albatrosses it couldn't shake from its neck.

Mike Zafirovski, the current Nortel CEO, was brought into the company to help restructure the organization and its operations. He was heavily recruited to replace Bill Owens, the short term CEO who was brought in to establish a corporate culture based on ethics and integrity following the financial shenanigans occurring under the leadership of ex-CEO Frank Dunn. Zafirovski's resume included top level positions at General Electric and Motorola, but the task he faced proved to be insurmountable over the long run. Nortel was headed on an accelerating downward track when he arrived and it proved to be a Herculean task to try avoiding the current crash and burn. Prior to his joining the company there were major opportunities to correct some of Nortel's many problems, but they were rejected by a board of directors who refused to face reality at the time.

During Owens' tenure former Cisco executives Gary Daichendt and Gary Kunis were hired as the COO and CTO, respectively, to develop new strategies to help Nortel move forward; neither lasted at the company for very long. After analyzing Nortel's operations they recommended some innovative actions, such as cutting some product lines, e.g. GSM and UMTS wireless units, consolidating the 33 (!) globally dispersed R&D centers, and partaking in joint ventures with competitors such as Nokia and Huawei. Daichendt and Kunis found most of their findings and recommendations falling on the deaf ears of their superiors. For example, a MOA with Nokia to sell the GSM/UMTS wireless units for about $2 billion was rejected by the Board of Directors, because they did not want to abandon the product lines. I remember Daichendt and Kunis from when they appeared at the last formal Nortel industry analyst five years ago, and both were highly optimistic about the company's future. Little did they know that their time at Nortel was winding down.

During the past few years, Zafirovski made headway in his restructuring efforts, but given 20/20 hindsight it was too little, too late. With executive management always thinking that a reversal of Nortel's fortunes was just around the corner and that the company's financial situation would magically clear up, it was only a matter of time before things would come crashing down. Instead of selling off business units and assets at attractive prices when opportunities came up, the executive management team and board tried to keep the company intact. Nortel presentations and press releases attempted to paint a rosy future for it even when it was clearly evident that disaster was coming. Just a month ago, Nortel executives told its enterprise systems user group that it would emerge from Chapter 11 a stronger company as a viable concern, although they should have known otherwise given the circumstances. The morale among employees was plunging quickly, you could easily hear it in conversation, and resumes were hitting the street faster than a meteor crashing from the skies.

Last weekend Zafirovski finally confirmed what the industry knew was coming: Nortel would not restructure, but sell off its remaining business assets to the highest bidders. Following the announcement of the sale of the carrier wireless units for $650 million to Nokia Siemens Networks, there are strong rumors that Enterprise Solutions will be the next business unit to go at a price of about $500 billion (far less than it would have fetched eighteen months ago). Financial analysts have calculated that about $2 billion will exchange hands when it is all over, a far cry from years ago when Nortel had one of the highest market capitalizations in the world.