From the National Post:
Picking up the pieces
The impact of the stunning telecom meltdown -- 20,000 jobs gone at Nortel alone -- has sobered the sector
David Olive
Financial Post
Peter Redman, National Post
JOHN ROTH, NORTEL'S CEO, IS PLAIN ABOUT HIS PLAN: "Our first priority is to survive the order drought."
Peter Redman, National Post
John Roth, Nortel chief executive, cashed out $135-million in Nortel stock options in 2000, before the shares lost about 80% of their value.
John Roth apologizes for the delay. He has been on the phone with a wireless customer, a call that went well to judge from the sound of Mr. Roth's trademark deep laugh that filled the chief executive's office.
"We need every customer, especially these days."
Mr. Roth is dressed in country casual -- beige sports shirt and brown slacks -- and might just have stepped from the workshop at his tree farm in the Caledon Hills, a short drive from Nortel Networks Corp. headquarters in Brampton, northwest of Toronto.
The CEO's garb hasn't changed since the heady days last summer when Nortel was the ninth-most-valuable company in the world. The firm has since lost about $280-billion in stock market value in the worldwide meltdown in telecommunications markets.
But even with this week's announcement that Nortel will shed an additional 5,000 employees, bringing the total to 20,000 lost jobs in recent weeks, or 21% of the workforce, Mr. Roth is careful not to reflect the abruptness and severity of the downturn in his own manner and dress.
The 31-year company veteran is acutely sensitive to the message he sends out to the firm's remaining employees. "The most important thing for them is to have confidence that Nortel knows how to get through this," Mr. Roth says. "They can see that we're taking every necessary step to remove costs and restore profitability. But we're also maintaining our R&D commitment, so that we come out of this having extended our leadership in the industry's most advanced products."
Still, Nortel's most recent financial results, released on Thursday, show how badly the company has been shaken by the stunning collapse in orders from U.S. buyers of telecom equipment.
Canada's most important technology company reported a first-quarter loss of US$2.58-billion and a big drop in sales for many of its products -- a shocking contrast to Nortel's rosy forecast only three months ago of 30% sales growth in 2001. Orders have instead been cancelled so quickly that Nortel is continuing to invite scorn on Bay Street by refusing to speculate about when a recovery might occur. "If I've learned one thing about providing guidance, it's that whatever I say is going to be wrong," said Frank Dunn, the firm's chief financial officer.
After his hectic employee recruitment activities of the past two years, Mr. Roth said the current layoffs "have been an agonizing time for the leadership team and the employees." But he has not apologized to shareholders for the tardy warning, in February, that the floor was falling out of Nortel's business, or for the $135-million he reaped by cashing out stock options last year before Nortel shares went into a nose-dive, losing about 80% of their value.
"I feel badly for any shareholders who have suffered," he said. "But while I do promote Nortel, I have never promoted the stock. I sold at the peak. When the stock broke a price-earnings multiple of 100, I thought that was a good time to sell. It was an astounding multiple. What I did was a matter of public record, and my actions were publicly known."
Mr. Roth, who still owns 800,000 shares of Nortel and has options to buy another five million, is the target of class-action suits over the February sales-forecast revision. And some pension funds are pressing for changes in Nortel's executive stock-option practices.
John Chambers, CEO of Nortel's most prominent rival, California-based Cisco Systems Inc., netted US$157.3-billion in pay and stock-sale proceeds last year. Cisco shares have also plunged 80%, wiping out US$400-billion in shareholder value.
But Mr. Chambers has not been criticized for his compensation. Nor has he been accused by critics of single-handedly dragging down his country's stock markets -- a fate shared by Mr. Roth and Kurt Hellstroëm, chief executive of telecom supplier Ericsson of Sweden. (At their peak last year, Nortel and Ericsson each accounted for more than 30% of the entire value of companies trading on their nation's leading stock exchanges. Expressen, a popular Swedish evening newspaper, refashioned its front page into a "Wanted" poster with a picture of Mr. Hellstroëm.)
Mr. Roth is not sanguine about the bleak short-term prospects for resumed growth in the telecom market, in contrast with Mr. Chambers. Even as Cisco reported a US$2.5-billion writedown on unsold inventory this week, the famously upbeat Mr. Chambers insisted that a return to the giddy era of 30% annual sales growth for his company is still a possibility over the next year or two.
Mr. Roth shakes his head. "We have a perfectly ugly convergence of the telecom buyers being shut out of the capital markets and the U.S. economy going south." Indeed, the telecom collapse is a big contributor to the wider economic malaise, leading some economists to wonder whether its woes were behind the surprise decision of Alan Greenspan, chairman of the U.S. Federal Reserve Board, to cut interest rates by 50 basis points this week.
The Nortel chief readily acknowledges the havoc for his company caused by network overbuilding. Established telecommunications carriers have cancelled or postponed orders until they shore up their balance sheets after four years of record spending on new equipment. And there has been an evaporation of business from startup carriers that are fighting to survive.
"We have customers who are desperate to buy equipment but can't find the money," Mr. Roth said this week. "And other Nortel customers are saying they'll wait to buy bankrupt network operators rather than order new equipment."
For hope, he draws on an analogy shared with him by one of his peers in the industry. "He mentioned that this is what it felt like to be Boeing after deregulation in the U.S. airline business in the 1970s. You had lots of new airlines, and Boeing was run off its feet building new planes.
"Then there was a collapse when it turned out too many airlines were chasing too few passengers, and the low fares they were using to lock up market share meant that everybody was losing money.
"After the industry tanked, you saw all these mothballed aircraft lined up at airports with the names painted out, and you could see where it once said 'Braniff' or 'People Express.' The crisis ultimately caused the disappearance of weak suppliers like McDonnell Douglas. But Boeing used the quiet period to continue its R&D efforts. And when the business came back, Boeing was ready with the next generation of aircraft."
The telecom market is paying the price for a similar outbreak of overspending, triggered by deregulation in the United States and Europe in the mid-1990s. In a pitched battle for market share between upstart and incumbent carriers, too many networks were built or greatly expanded. When it became clear last year new construction was outpacing revenue growth, bankers and equity markets suddenly withdrew their support from an industry where capital spending had been growing at the torrid pace of 30% or so a year.
"The capital markets loved our industry," Mr. Roth said. "If you could spell 'telecom' the banks and stock market would throw money at you. The industry was growing so fast that until late last year my biggest problem was that our customers were still beating me up for not delivering orders fast enough."
Now that the mania has passed, "our first priority is to survive the order drought," he said. "This company grew 42% last year. We became a US$30-billion company and we could see US$40-billion on the horizon. I'm not going to pretend we grew efficiently. You don't grow that fast in elegant fashion."
And so Mr. Roth has been cutting research and development funds for products that do not have significant, and almost immediate, revenue potential. These are also the areas where jobs have been cut. It's a triage operation, in which Mr. Roth tries to protect what he expects will be Nortel's most promising products of the future.
"We have to be certain that when we come out of this quiet period, we will have the right stuff. Historically, downturns accelerate the shift to new technology. In good times, human nature is for customers to keep buying what they bought yesterday. But after a period when you haven't bought anything, you start with a clean sheet of paper. You look to buy the newest things."
The turnaround plan gets grudging support from some stock-market analysts. "Nortel's stock will be one of the first to recover," said James Parmelee of Credit Suisse First Boston Inc., "based on its strong product portfolio, blue-chip customer relationships and aggressive cost-reduction efforts."
Mr. Roth's comeback strategy follows the Boeing model more by coincidence than design. He has endured at least three sharp downturns in his career at Nortel, and takes a certain amount of satisfaction from the opportunities they present.
For instance, during the previous slump, in the early 1990s, Mr. Roth persuaded his superiors to enter the new field of wireless, a business with better growth prospects than Nortel's then faltering business of making circuit-switching equipment for the U.S. Baby Bells and other large telcos.
This year, wireless will be Nortel's biggest source of sales. It was a rare bright spot in the first quarter, with sales up 38%. "Wireless subscribers are the most demanding customers in the industry," said Mr. Roth, who identifies these road warriors as a blossoming profit centre.
"They're highly mobile and have an urgent need for desktop-computing capabilities in the field. But when they're on the road, they don't have the IT support they get in the office. So the carrier that provides their wireless service ends up becoming their chief information officer. There's a huge opportunity for carriers to make money doing that."
The previous downturn also gave Mr. Roth the chance to streamline an organization that was choking on bureaucratic excesses that accumulated during the previous good times. In the mid-1990s, before he became CEO in 1997, Mr. Roth folded Nortel's semi-autonomous R&D arm into its manufacturing operations to bring researchers closer to the customers. He also began to de-emphasize older products such as digital switches in favour of Internet-oriented gear. In the current decline, what remains of the traditional circuit-switching business that used to be Nortel's bread and butter has taken a big hit.
Mr. Roth is reorganizing the firm yet again. He has shuffled the most promising high-margin products still in development into eight recently formed operations whose mission is to pursue new markets. He calculates that each of these new products has the potential to create its own market niche. They are expected to change how customers work, reducing their costs and providing new capabilities and functions.
The Nortel CEO won't reveal the identity of the new ventures for competitive reasons. But they include advanced wireless systems and devices for connecting corporate offices that use the Internet-protocol language of the computing world to the high-speed networks operated by public carriers.
"The carriers have invested all this money to create huge bandwidth, but corporations haven't figured out how to use it," said Mr. Roth, describing what he sees as another largely untapped market. Advances in high-speed networks have reached the point where the costs of bandwidth, or transmission capacity, are falling faster than the cost of computer processing in servers, routers and storage devices. Businesses stand to reap a windfall in equipment, maintenance and real estate if those computing functions can be moved off their premises and on to public networks with their enormous bandwidth.
Financial services companies, where IT is 11% of total costs, are leading the way in this trend. IT represents 3.4% of total U.S. gross national product, "so it's a huge potential area of future investment," Mr. Roth said.
Building those big public networks, which connect cities, was a $20-billion business in North America last year. Building so-called metro optical networks, which connect office buildings to the public networks, is another $20-billion business -- or will be, once the capital markets end their current strike action.
As recently as early February, when Mr. Roth was still anticipating double-digit sales growth for 2001, Nortel was identified in The Wall Street Journal as a company that would soon have to cope with the bureaucratic sclerosis that saps the entrepreneurial spirit of mega-firms.
Battered telecom suppliers such as Nortel, Cisco and Lucent Technologies Inc. might now be wistful about a time when overly rapid growth was the cause of sleepless nights. Yet Mr. Roth seems almost relieved at the chance to rebuild his company in a more disciplined way.
"As we've doubled in size, there's been a proliferation of products and people. And in times like that you take your eye off efficiency. You're just trying to win the race for market share, and you focus on not letting down the customer who wants his product delivered yesterday."
For the past four years, Mr. Roth has been exhorting his employees to move at "Webspeed" to get new products to market. He also urged his customers to quickly embrace the equipment requirements of the Internet or risk being left behind. The stunning reversal of the industry's fortunes, which occurred at Webspeed, is a lesson in being careful what you wish for.
Making the best of a trying situation, Mr. Roth now observes that "there's no reward for being a big company. The complexities of big businesses are larger than management's ability to deal with them."
He still wants Nortel to be the first to market with products that will contribute to a faster, easier to use Internet. But he now has a smaller-is-beautiful vision for his firm.
"We shouldn't need a rough patch to make us continually hive off products that have become low-margin commodities," he said. "If we got into that habit, we would constantly grow our profits, but not the overall size of the operation. It might be that the ideal company is one that would grow its revenues by 30% a year, but never get any bigger."
THE TELECOM TRAIN WRECK: HOW IT HAPPENED:
1996 Deregulation in the United States and Europe shatters monopolies, opening a US$300-billion market to competition.
1996-97 WorldCom buys two upstart networks. This inspires freelance network builders to put telephone lines in the ground and hope for a carrier to buy them out.
Late '90s Internet mania spurs the upstarts and established carriers to build high-speed networks and fibre-optic trunk lines, using equipment from Nortel, Cisco, Lucent, Ericsson and Alcatel. Demand is booming, but revenues are flat.
2000 Telecom players start missing their financial targets.
2001 Debt-burdened carriers and equipment makers can't make payments on debts without resorting to asset sales. The market is flooded with barely used equipment. By the spring of 2001, half the 50 publicly traded telecom upstarts face disappearance through bankruptcy or merger. Investors call for the heads of CEOs at Nortel, Ericsson, Motorola, British Telecom and Deutsche Telecom. All these firms, along with other former stock-market darlings Cisco Systems, JDS Uniphase and Solectron Corp., are laying off as many as 20% of their employees. Analysts say the industry might not recover until 2003.
dolive@nationalpost.com |
