Skip to main content
the nortel saga

INDRANIL MUKHERJEE

The departure of Nortel Networks Corp.'s CEO and most of its board marks the effective end of the 124-year-old company. But the remarkable aspect is that Nortel lasted as long as it did, given its rapid descent from national hero to national disgrace.

"I knew when I joined the board it was high-risk," said Harry Pearce, who stepped down as chairman Monday after four years as a Nortel director. The litigation lawyer - a former chairman of Hughes Electronics and a former vice-chairman of General Motors - said he was under no illusions when he came on board in January, 2005, after a major accounting scandal had pushed Nortel close to the brink.

"I knew it would produce enormous litigation exposure. I suspected it was going to be extremely expensive to settle all that."

That reflects the feeling within the current Nortel team - that they inherited a mess in terms of a weakened market, an accounting crisis and skeptical investors. The line from both management and board is: We made the best of a bad situation, but external events sealed our fate.

Mike Zafirovski said when he became CEO in 2005 that he felt there was a 30- to 40-per-cent chance Nortel would not survive. "You are not going to be losing market share in everything you have - with a B-minus credit, a weak balance sheet - and say it would be a guaranteed success," he said.

During the current economic crisis, it is common for managers to blame their predicaments on external events. Yet the question remains: Should the current board and management have done more to prepare for those events?

Mr. Zafirovski says he might have pressed harder to raise cash and increase the scale of Nortel so that it could compete with big international rivals. It came close to acquisitions, but the price was always too high, in his opinion.

When the financial meltdown hit global telecom markets last year, Nortel was already exposed. It was "devastating" to file for bankruptcy protection, Mr. Zafirovski said. "We moaned and groaned and said life is unfair. But there is a sense of pulling ourselves up by the bootstraps and saying, 'By God, we would do the best we can with a new set of cards.'"

For Mr. Pearce, that hand was already dangerously weak, including a devastating accounting scandal, that produced multiple financial restatements and the ousting of the company's leadership in 2004. It damaged Nortel's reputation, sapped management resources and left the company with a bill that was to prove too expensive for the coming environment, he said.

In early 2006, he and Mr. Zafirovski sat before a New York federal judge who had been appointed mediator for the shareholder class actions against the company. "We told him flat out, we had no real defence for these actions," Mr. Pearce said. "The conduct of that senior management team was such that in my professional view we had no defences. So our only defence was affordability. We could only provide the amount of settlement dollars that the company could ultimately afford and still survive."

Nortel agreed to a settlement of nearly $2.5-billion (U.S.) - betting that the settlement would clear the way for Nortel's renewal. But several external forces began to play. The settlements left the company with "an extremely delicate and imperilled balance sheet" as the world economy tanked and the global credit market seized up. "The settlement put the company on the brink," Mr. Pearce said.

At the same time, the communications gear industry started to consolidate into larger, global players, and Nortel realized it needed to grow quickly to compete. It tried unsuccessfully to make several acquisitions.

"We knew we had to grow. So we were simultaneously trying to do deals that made sense as we were trying to get everything in order. We came close to some transactions," he said.

Mr. Pearce and executives won't say which players they pursued, but one company that was widely reported as a target several years ago was Avaya Inc. The New Jersey-based company has since undergone a turnaround of its own and has bid $475-million for Nortel's enterprise unit.

Without a major acquisition, Nortel faced a bleak financial picture. As the economy crashed, the company needed quick access to cash, but then the credit markets froze.

The board was left with no other option but to try to sell an asset quickly.

"We didn't have a lot of time to raise a lot of cash once we understood that government support was unlikely, we didn't have any other alternatives. The credit markets were absolutely non-existent," Mr. Pearce said.

Last September, Nortel decided to put one of three divisions on the block. The metro ethernet networks unit makes optical gear for delivering multimedia content over local broadband networks and was one of the fastest-growing portions of the company.

It was a prized asset and several bids came in quickly, but some outsiders suspected that Nortel was close to filing for creditor protection and they offered less than the board was willing to accept.

The complexity of Nortel's situation made it hard for Ottawa to step in with support when the credit markets froze. But the company did seek assistance unsuccessfully once in creditor protection. "It's hard to fault the government," Mr. Pearce said.

The former chairman praises his fellow directors and especially his CEO for efforts over several extremely tense years. "It's sobering," Mr. Pearce added. "We did our best."

That is Mr. Zafirovski's view, too. After the court protection filing, he said he decided to stay as long as it took to stabilize the business. His departure was set in motion in April-May, he said, when it was decided that there should be a streamlining of management and the board in the third quarter.

About two weeks ago, management, board and the court-appointed monitor agreed there was "some elegance" in announcing the resignations at the same time as second-quarter financial results - which Mr. Zafirovski insists were "remarkable," given the circumstances.

But with Mr. Zafirovski gone, it remains to be seen what will happen to the heart and soul of Nortel, the engineers who develop its intellectual property. The multinational bidders for the Nortel units hope they remain - and Mr. Zafirovski insists this should happen.

"What's in it for brilliant engineers is the opportunity to do what they are doing, possibly on a large scale, in a larger theatre," he insists.

As for Mr. Zafirovski, he could see himself as a CEO again, but nothing has been lined up yet. He is ensured of no further compensation from Nortel. He must join other employees in trying to claim a severance package of, theoretically, two years salary.

But there is one sliver of good news. Mr. Zafirovski, who divided his time between Chicago and Toronto, put his Toronto condominium on the market and it sold in one day - at the list price. "At least there is the good news that the Toronto real estate market is progressing well," he said.

Interact with The Globe