Nortel Networks' bankruptcy filing is proof that in corporate life, there is such a thing as karma.
The thing is in flames now, this once-iconic Canadian champion. But the shocking thing is how few people will really care, aside from employees, who've been living in fear for their jobs the past eight years and now face more of the same, and the lenders and creditors. The rest of us are like bystanders who gather on the sidewalk to gawk at a burning building. We're fascinated, but we have nothing at stake in the outcome.
Investors have moved on. The only people who've bought Nortel shares in the past six months are speculators, clueless retail investors who've already lost their money, and incompetent financial pros for whom wishful thinking trumps good sense. On Bay Street, it's hard to find any investor with credibility (except for the ones who specialize in distressed bonds) who can even form a serious opinion on the company or its prospects.
Ask a typical mutual fund or pension manager about Nortel, and watch as his eyes wander, and he begins to stare out the window: Can't we talk about something else? Why waste time and brain cells analyzing a company that burned its investors, not once or twice but repeatedly? Nortel has gone from the stock they had to own, to the one they couldn't possibly own, if they wanted to stay employed.
Don't be too harsh on chief executive officer Mike Zafirovski. He was handed a poisoned chalice when he accepted the job in 2005. It's highly unlikely that he realized how bad it really was, or how much damage had already been done under the watch of the CEOs before him. There was Bill Owens, the ex-military man; Frank Dunn, the accountant who couldn't count, and who now faces criminal charges for the bookkeeping scandal that distracted the company for several years; and John Roth, who got an F for profitability, but an A+ for stock promotion. Mr. Dunn and others have denied the allegations and no charges have been proven in court.
That Mr. Roth walked out of the company an insanely rich man (courtesy of stock options and the tech bubble) is one of the great injustices of Canadian business in our time. But the bigger problem was that the Rothian habit of over-promising and under-delivering lingered at Nortel long after he departed. When Mr. Zafirovski arrived, the company was missing its deadlines with customers about 25 per cent of the time; on brand-new technologies, it missed about 80 per cent of the time.
Nortel's sales, which plunged from a bubble-inflated $28-billion (U.S.) in 2000 to $10-billion three years later, barely grew again in the post-bubble recovery. It's one thing not to be able to produce an accurate set of financial statements on time; it's another not to be able to give your customers what they've paid for on time.
Nortel, as a consequence of this and other problems, could never solve its No. 1 flaw. It was No. 2 or 3 or 4 in a few areas, but market leader in nothing. In technology, the top company often sucks up the majority of the profits. Google is the best at Internet search and makes about 25 cents in profit for every dollar in revenue; Yahoo is second-best and it's a dog. Intel rarely fails to make at least $5-billion, even in a bad year, but competitor Advanced Micro Devices consistently bleeds red ink. And so it went for Nortel - always trailing Cisco Systems in this product line or Ericsson in that one, or fending off some new Chinese competitor that didn't have to pay engineers so much.
That's also why this restructuring is more likely to result in Nortel's piece-by-piece dismantling, with the eventual disappearance of the company, than other large corporate bankruptcy cases in Canada. Whatever you think of Air Canada, the country needs a national airline. Stelco was able to emerge from bankruptcy court because there was a global steel shortage and the industry needed its capacity.
But the telecom world doesn't need Nortel. If it were to vanish tomorrow, its competitors would quickly fill the void. And investors don't need it, either. In the past decade, Nortel has never managed to produce a return on capital of more than 3.5 per cent in any one year, according to data from Standard & Poor's Capital IQ. In short, it hasn't even come close to earning the cost of its capital.
No business with such horrible economics can survive indefinitely. A massive restructuring was inevitable; the financial crisis just made it happen sooner. Yes, it's still a sad day. But for the thousands of investors who lost money because they believed what Nortel was telling them - in the hype of Mr. Roth, in the false turnaround of Mr. Dunn, in the "cleaned up" accounting statements of Mr. Owens that had to be restated again - there's also a sense that what goes around, comes around.