Canada's closely-watched tech giant

CBC News

Nortel Networks, the Canadian telecommunications equipment giant, began its corporate life in 1895 making equipment for traditional phone companies in Canada, a few years after Alexander Graham Bell invented the telephone. Originally, part of Bell Telephone, it morphed into Northern Telecom, and finally Nortel. The company remade itself as an Internet company in the 1990s and was often called the poster boy for companies making the transition into the new economy.

But when the Internet bubble burst in 2000, Nortel went from poster boy to whipping boy.
Major changes began at Nortel when John Roth took office in 1997 as the company's president and chief executive officer. He saw that the marketplace of communications was shifting from telephone technology to the Internet. The trick was figuring out how to speed up the process of getting new products and services into the market so Nortel could keep ahead of the fast-paced Web world. In the past, it often took as long as five years to complete a research and development project.

Under Roth's leadership, Nortel was dramatically restructured. Forums were created where nominated employess from every level gathered to help make the company more in tune with the wireless and optical marketplace. Nortel moved to outsourcing much of its production, resulting in the closure of 18 of the company's 24 plants.
The changes helped put Nortel at the top of its league. By some estimates, Nortel equipment was carrying 75 per cent of the Internet traffic in North America as the 1990s came to a close.
Nortel's growth was in part based on acquisitions. It went on frequent buying sprees, often using its own stock to make acquisitions. In 2000 alone, it bought 11 companies for a total of $19.7 billion US.

And then the bubble burst.
Nortel's best customers – telephone and data carriers – began warning that they would be drastically cutting back on their purchases of specialized Nortel equipment. Nortel's sales plunged by 50 per cent. The value of the companies Nortel had bought collapsed too. In less than a year, firms that Nortel had paid billions for were worth just hundreds of millions.
Following the dramatic downward revision in the company's outlook for 2001, some industry watchers (who used to be cheerleaders for Nortel) began questioning Roth's leadership and credibility, especially since the company earlier promised three times that it would meet its 2001 financial targets. Irate investors filed numerous lawsuits against the firm.

Roth – named Canada's "Business leader of the year" in 2000 – stepped down as president and CEO in early October 2001, replaced by Frank Dunn. The company announced another 10,000 job cuts and a third-quarter loss of $3.47 billion later that month.

The jobs cuts continued as Nortel struggled to deal with the unprecedented downturn in its business. By the end of 2001, Nortel had just 45,000 employees – half the workforce it had begun the year with.

The bottom line for 2001 was brutal – a loss of $27.3 billion US.
And 2002 brought more misery, and mere glimmers of hope. In February 2002, the company's chief financial officer, Terry Hungle, resigned following allegations that he broke the company's trading rules in some of his personal stock transactions.
In subsequent months, Nortel warned that business was still not picking up; its long-term debt was downgraded to "junk" status by both Moody's Investors Services and Standard & Poor's; and by October, its shares had plunged to just 69 cents – more than 99 per cent lower than where it had been barely two years earlier.
More job cuts brought the company's work force to 35,000 by the end of 2002, about one-third of the work force Nortel had at the start of 2001.
Then, two years of savage job-cutting started to pay off. In January 2003, Nortel reported better-than-expected results that led some analysts to raise their outlooks.
Nortel said it was on track to report a profit by the middle of the year.
As it turned out, the company managed a $54-million US profit in the first quarter – its first quarterly profit in three years.
Its stock price began to rally, topping $6 by September as it signed billions of dollars in new deals with Verizon Wireless in the U.S. and Orange in France.
Technology companies were again spending – not like they were in 1999 – but at least they were spending.
Nortel announced new deals with mobile phone companies Verizon and Orange. In October 2003, the company posted another quarterly profit, and in January 2004 it announced its first annual profit since 1997.
But in March 2004, Nortel warned that it would delay filing its audited financial statements for 2003 and would likely make more financial restatements, sending the stock plunging. The company then put its chief financial officer and controller on paid leave. The stock sank again.
Both the U.S. Securities and Exchange Commission and the Ontario Securities Commission began investigations in April 2004 of Nortel's earnings restatements.
Then on April 28, 2004, Nortel fired its top executive, Frank Dunn, and the two executives who had been on paid leave, and put four more on paid leave. It said a preliminary review suggests its calculated profit for 2003 will have to be reduced by 50 per cent.
In May 2004, the U.S. Attorney's Office in Dallas launched a criminal probe into Nortel, requesting documents going back to Jan. 1, 2000. The Ontario Public Service Employees Union Pension Trust filed a class-action lawsuit against Nortel a few days later.
Nortel's problems continued when it said on June 2, 2004, that its updated financial results for 2003 and the first quarter of 2004 still weren't ready. It subsequently missed three self-imposed reporting deadlines as it struggled to unravel the accounting mess left by the previous management.
Another criminal investigation into Nortel's accounting practices, this time by the RCMP, began in August 2004. Days later, Nortel cut 3,500 jobs, about 10 per cent of its workforce, and fired seven more people from its finance department over accounting problems. Nortel later announced the job cuts would total 3,250, with 950 of those jobs coming from Canada.
When Nortel finally filed its 2003 financials in January 2005, the revisions lowered the company's initially-stated profit of $732 million US to $434 million US. Its 2004 financials, reported in May 2005, showed that the company actually lost money that year – $51 million US. Revenues fell 3.6 per cent from 2003. CEO Bill Owens said he wasn't happy with the results, but said that Nortel, at last, was "now stable."
Just a month later, the company's president and chief operating officer, Gary Daichendt, and its chief technology officer, Gary Kunis, resigned. Both had been with the company less than three months.
In October 2005, Nortel picked former Motorola executive Mike Zafirovski to succeed Bill Owens as CEO. Several months later, Nortel announced it had put aside $2.5 billion US to settle some class-action lawsuits stemming from the company's 2004 accounting scandal.
In March 2006, Nortel once again announces its financial filings will be delayed and it will restate financial results for 2003, 2004 and the first nine months of 2005. It also announces a $2.2-billion US loss for the last quarter of 2005, due mainly to the cost of litigation to settle lawsuits from its shareholders.
In May 2006, Nortel Networks warned investors that its first quarter revenues would be flat or down slightly, and that it would post a slightly higher loss than in the first quarter of 2005. In a conference call with analysts, CEO Zafirovski pledged to "recreate" the "great company" that Nortel once was.
Just weeks later, CEO Zafirovski announced a further restructuring. The changes include the elimination of another 1,100 jobs, the creation of two new "centres of excellence," the conversion of the company's pension plan to one that doesn't guarantee a specific pension benefit, and a trimming of other retirement benefits. The company hopes to save $175 million US a year by 2008.
On Dec. 1, 2006, the company went ahead with a 1-for-10 stock consolidation. Its shares jumped 10-fold in price to over $24, but the number of shares plunged from 4.33 billion to 433 million.
But Nortel's restructuring efforts were not over yet. Despite shedding more than 60,000 jobs in six years, the company announced another 2,900 job cuts in February 2007 — a move that would bring the payroll down to 31,000. Another 1,000 jobs would switch to lower-cost countries like China, India and Mexico.
Even after all those cuts, Nortel is still North America's largest maker of telephone equipment.
But it was still making news for the wrong reasons. In March 2007, the U.S. Securities and Exchange Commission and the Ontario Securities Commission announced legal proceedings against former CEO Frank Dunn and three other former senior executives. The SEC accused the four of civil fraud relating to Nortel's accounting and its restatements. The OSC alleged that Dunn and two others broke securities laws by making "material misstatements" in Nortel’s financial filings that they knew or should have known were "materially misleading."