Why GM survives but Nortel doesn't

From the moment Nortel Networks lurched into bankruptcy protection in January, it was obvious what the end would bring for shareholders - the loss of their entire investment and an object lesson in the price of betting on hope and fantasy.

But for those who appreciate the history, it was still disorienting to see it come to this yesterday morning. No trades. No quote. No value. And soon, no more Nortel. From $350-billion to zero in nine years, it is the greatest single case of investor wealth destruction ever in Canada.

Nothing else has come close. Nothing else will for a very long time. That story is now over, but so is the life of one of the country's oldest and most important corporations.

"We could never get a plan that made sense," said a high-level source at Nortel, describing why, after 114 years, the company will be broken up and sold off piecemeal, with the Canadian Telecom Yard Sale at an advanced stage and foreign buyers now poking around all remaining assets of any value.

"Discussing potential outcomes of the sale of Nortel's businesses is purely speculative," said a Nortel spokesman.

When Nortel filed for creditor protection in the United States and Canada, chief executive officer Mike Zafirovski and the board hoped it could survive in some pared-down form - possibly by selling its enterprise unit and other assets, and leaving intact (as much as possible) the most profitable group, which sells equipment to telecom and cable companies.

Like all of the restructuring plans (at least six) Nortel has crafted under four separate CEOs since the bubble burst in late 2000, this one had a surface logic to it. But Nortel's creditors didn't buy in - didn't believe that, at the end of it all, a viable company would emerge from it.

Simply put, for all of its research and development spending ($5.2-billion U.S. over the past three years), Nortel is too far behind the competition to catch up. That's what will happen when you spend the better part of a decade (a) changing senior executives like hockey teams switch coaches; (b) digging yourself into, then out of, an multiyear accounting scandal; (c) beating back lawsuits from shareholders; (d) answering letters from the U.S. Securities and Exchange Commission; and (e) announcing a new round of layoffs every fortnight.

Of these, the most toxic was the accounting scandal of 2004-06. "It tied management and the board in knots for three years," says the insider. "That was crucial time to lose." You can find many numbers to illustrate Nortel's financial difficulties, but one of the most telling doesn't have a dollar sign attached to it. It's 25 - the number of board meetings Mr. Zafirovski attended in 2006, his first full year on the job, as the company was grappling with yet another bookkeeping misstep and trying to settle the shareholders suits.

"If you have that many board meetings, guess what management is doing? It's preparing for board meetings," says the insider. And, by inference, it's paying less attention to the business.

So Mr. Zafirovski got off on the wrong foot: As long as the scandal and the litigation were hanging over the company, Nortel couldn't buy anything of significance (no one would accept its shares) and couldn't sell.

Alcatel merged with Lucent, and private equity firms won the bidding for Avaya, and Nokia and Siemens formed a joint venture, and Cisco Systems carried on buying small, promising technology upstarts. Nortel was left out, stuck with the same strategic problem from which it had long suffered: It was good at many things, but not a market leader.

It's hard to pin too much blame on Mr. Zafirovski or the current directors. The die was cast years ago, back in the boom time of John Roth, whom Canadian Business magazine once wrote should receive the Order of Canada, but who unquestionably planted the seeds of today's failure. His acquisitions created a far-flung global business of 95,000 employees, without the modern accounting and management controls needed to keep track of it.

But the long process of breaking down the House That Roth Built didn't merely distract the staff. It also killed much of the public support Nortel had enjoyed - the sense that the company was important. Even now, it is the largest spender on technology research and development in Canada. It spawns startups and entrepreneurs. But it's far easier to know someone who has been fired by Nortel than somebody who still works for it: The company is down to about 6,000 Canadian employees, from 26,000 near the end of the Roth era. And that's to say nothing of the damage it did to some people's investment accounts.

So when Mr. Zafirovski went calling on the federal government for financial help, it was easy for the feds to say no. Nortel, arguably, matters more to Canada than General Motors or Chrysler do. But it's being dismantled, while those auto makers get a bailout. Why? Because of politics and because it can't make a credible case for its own survival. Nortel is dying because there's no one left to argue that it should live.

Report on Business Company Snapshot is available for: NORTEL NETWORKS CORPORATION