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Nortel Networks (TSX: NT) Telecommunications equipment manufacturer
Established: 1895 (as Northern Electric and Manufacturing)
Employees: 30,000
Altman's Z-Score: 1.57
Probability of bailout: low
How did it go bad?
Depending on how far back you look, some blame former CEO John Roth, who overspent on bad acquisitions during the interwoven dot-com and telecom bubbles. Others blame Roth’s successor, Frank Dunn, the former CFO who was at the helm during Nortel’s seismic accounting scandal, leading to financial restatements that have plagued the company for years. And some point to the unsuccessful 19-month tenure of Bill Owens, the heat-of-the-moment replacement for Dunn (who was fired for cause in early 2004 and still faces legal charges, though he denies any wrongdoing).
But to blame his predecessors is to create excuses for current CEO Mike Zafirovski, who was hired in November 2005 at much cost — US$20 million in salary, plus US$40 million to settle a contract dispute with his former employer, Motorola. Zafirovski was confident he could fix Nortel’s mess. He and his hand-picked team of execs crafted a three-to-five-year turnaround plan that involved a new corporate structure, a focus on dramatically improving gross margins and operating expenses, and realigned R&D priorities.
The strategy may have been right, but it probably came a few years too late. Nortel’s competition and customers were already consolidating, and low-cost foreign competitors such as China’s Huawei were coming on strong. Meanwhile, Nortel’s product portfolio was appearing frayed, with too much reliance on older technologies. And that was all before the credit markets froze, the economy tanked and customers deferred capital spending programs. Nortel was quickly unable to finance its heavy debt burden, and hopes to sell its promising Metro Ethernet Networks division went nowhere.
How ugly is it?
On Jan. 14, Nortel filed for bankruptcy protection in Canada, the United States, Israel and the U.K., one day before $107 million in interest payments came due. In December, its debt ratings had already been reduced by Moody’s to Caa-2 (signalling a threatening bankruptcy) and several of Nortel’s suppliers were getting antsy — some had even stopped shipments due to late payments. Without protection, Nortel says it would have stopped operations in Canada as soon as Q2 this year.
Further proof of the company’s dire straits came on March 2, when it released Q4 and fiscal year-end results for the period ending Dec. 31. They were ugly.
• Q4 revenue was down 15% year over year; annual revenues were down 5% to US$10.4 billion.
• It lost US$5.8 billion last year, or US$11.64 a share, including non-cash charges of US$2.2 billion in Q4 to reduce goodwill and deferred tax assets.
• It burned US$1.1 billion in cash, ending the year staring at US$4.5 billion in long-term debt.
Nortel is now creating a restructuring plan it hopes to present to creditors in April, but has already announced 5,000 employees are being laid off. The company has decentralized its operations into three major lines of business — Carrier Networks, Enterprise Solutions and Metro Ethernet Networks — while groups such as marketing, R&D and even the global services division that once spanned the company have been broken up and tucked into the three corporate silos. Why the shuffle? The theory is that it will be easier to sell one or more division outright if they are already separate.
What if?
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