Just off Highway 427, in an industrial strip of suburban Toronto, sits the new global headquarters of Nortel Networks Corp. The 160,000-square-foot building is one of a set of triplets whose neighbours are a hulking food warehouse and a miscellany of small businesses. Inside the HQ, the perks consist of wireless access, a small cafeteria and a wellness centre. Long gone are the 2.5 kilometres of walking trails, the basketball court, the Zen garden and the indoor climbing wall—indeed, all the accoutrements of Nortel's former million-square-foot home further west, in Brampton.
Welcome to what its public relations crew calls "the new Nortel"—the one that Mike Zafirovski has been trying to turn around since he took over as CEO in November, 2005. Wearied by a seemingly endless chain of embarrassments at the once-bulletproof company, investors welcomed Zafirovski as a veritable superhero. With a winning record in the U.S. phone industry and even a sort of superhero nickname to boot—Mr. Z—Zafirovski was the guy who would set things right.
The Z team insists they have what it takes to get Nortel off the floor and reclaim its status as a Canadian champion. But more than two years after Zafirovski's arrival, the challenge they face is not so much how to grow but how to keep from shrinking further. While Nortel has struggled with its repair job, the telecom industry has moved on in ways that make the odds of Nortel catching up even more daunting. Perhaps the only route to redemption is combining fortunes with another beleaguered player—like the wireless business of Zafirovski's alma mater, Motorola, as rumours had it in early February.
Nortel's chief strategy officer, George Riedel, for one, isn't ready to make any grandiose commitments. "Is there a chance we're going to be the 100,000-person organization we used to be 10 years ago?" he asks. "Who knows? That's a long, long way."
In 2000, it seemed as if everyone in Canada owned Nortel shares. The stock was on a tear, lifting the manufacturer of telecommunications equipment to the top spot in the country for market capitalization, ahead of even the banks. CEO John Roth was lionized by Time and the business press.
All of this was thanks to a world that had gone mad for Web-surfing and e-mail, making one of Nortel's bread-and-butter products, optical equipment, white hot. Nortel's big boxes move Internet or long-distance phone traffic through networks owned by telecoms. As telecoms around the world scrambled to expand their optical networks and increase their bandwidth, investors couldn't get enough of Internet stocks, including Nortel.
But when the tech bubble burst in 2000, telecoms suddenly recognized they wouldn't need all the bandwidth capacity after all, and abruptly slashed their orders with Nortel and rivals such as Lucent Technologies Inc. The U.S. Securities and Exchange Commission alleges that this is when Nortel's bookkeeping faux pas started—according to the SEC, executives pulled forward revenue to mask the slowdown and meet targets.
By the first quarter of 2001, Nortel's fate had changed dramatically. It was losing money and axing thousands of jobs, like the rest of the telecom-gear gang. By the end of that year, Roth was on his way out, replaced by the company's unflashy chief financial officer, Frank Dunn, a Nortel lifer.
Although customers kept a tight hold on their purse strings, there were promising signs for Nortel in the spring of 2002, when Dunn started talking about leaving the red ink behind. Indeed, Nortel recorded a profit in the first quarter of 2003. But the SEC alleges that Nortel inappropriately used reserves to make the gain.
While its rivals continued on the path to recovery, Nortel's accounting issues mounted and held the company back. Financial restatements for prior years, issued at the end of 2003, went from being viewed as a hiccup related to the restructuring chaos to a full-blown crisis in their own right. The accounting fiasco led to the firing of Dunn, chief financial officer Douglas Beatty and controller Michael Gollogly in April, 2004, and also opened the door to criminal and regulatory probes on both sides of the border, along with shareholder lawsuits. "I'm glad I haven't had to live through some of the things they've had to live through," says Tim Krause, chief marketing officer for North America at Nortel's French-U.S. rival Alcatel-Lucent. Ultimately, Nortel went through four restatements.
Dunn's replacement, board member William Owens, had limited experience in the tech business but boasted an illustrious military CV: He was formerly the second-ranking officer in the U.S. military. The last-minute appointment was meant to soothe worried investors, customers and employees. Owens was a caretaker, not a turnaround specialist.
