'Worst meltdown' a business disaster
Saturday 16 June 2001
Deborah Yedlin
It's hard to believe, but there is at least one person still smiling even as stock in Nortel Networks Corp. continued its downward slide to a new 52-week low: Jean Monty.
Monty, head of BCE Inc., opted to sell his company's stake in Nortel last July when the market still believed the stock was headed for the moon.
After BCE spun off its 39.2 per cent holding in Nortel to BCE shareholders in May 2000, it was left with 60 million Nortel shares for its own account. In the name of building a war chest for future acquisitions, Monty decided to monetize 47.9 million of those Nortel shares at an average price of $90 per share.
Was Monty smart, or lucky?
Last summer, Ross Healy, president and chief executive officer of Strategic Analysis Corporation who began his career as a technology analyst in 1968, said he was already seeing signs of overbuilding in the fibre-optic world.
"If it was that obvious to me, how obvious was it to Jean Monty?" queried Healy.
To put the Nortel meltdown in context, the company's shares have fallen 87.8 per cent in 11 months, from a high of $124.50 to a low of $15.17 Friday. While last summer it made up about 35 per cent of the TSE 300 composite index, Friday the number was 6.6 per cent, only two percentage points ahead of the Royal Bank of Canada.
The $330-billion loss in market capitalization is equal to roughly one-third the value of the Canadian economy. As Patricia Croft of Sceptre Investment Counsel put it, "it would be as if Quebec all of sudden disappeared."
Market strategists, including Dunnery Best of Merrill Lynch Canada, are calling it the worst meltdown in Canadian business history, surpassing the oilpatch bloodbath of 1981 and 1982.
"The difference is how much faster the tech sector collapsed," said Best who believes there is no way anyone could have predicted the magnitude of the tech industry's Waterloo.
In addition to announcing 10,000 additional layoffs on Friday, Nortel revealed its second quarter numbers would show a $19.2-billion US loss, the biggest in Canadian corporate history.
The $19.2 billion includes the writeoff of $12.3 billion in goodwill associated with the company's acquisition binge, leaving about $4 billion left from the approximately $18 billion on the books at the end of the year.
While analysts such as Anthony Scilipoti note that the writeoff is a non-cash transaction, Healy says it amounts to a quasi-admission on the part of Nortel management that the acquisition strategy was essentially a bust.
"It shows that the company isn't earning enough to support the goodwill associated with the acquisitions," said Healy who called the move clean-slate accounting and is looking for Nortel shares to touch bottom somewhere between $8 and $11 per share.
Clean slate aside, Scilipoti is focusing on Nortel's cash position.
"When you have a company eliminating dividends, which amount to $60 million per quarter on sales of $3 billion, that tells me the next thing they will do is send an
e-mail to all staff saying they can't use paper clips anymore," said Scilipoti, who has been raising flags about the company's position since the beginning of May.
"If they don't have enough cash, they can't invest in new technology and they could be left behind."
Given that the capital markets are anything but warm to a technology company raising money, and with Nortel's debt on credit watch, Scilipoti says the company might have to look at other ways of raising money, including selling real estate.
While management appears to be taking the right steps, however unsavoury, when it comes to controlling costs, Healy says a return to profitability won't necessarily mean a return to growth.
"Demand for broadband may be growing but technology is being developed by companies to maximize throughput on fibre-optic lines so even if demand is increasing 100 per cent per year, if technology exists to increase existing fibre-optic capacity on existing strands it could take decades to work through the excess supply," said Healy.
"It's not unlike the situation of the railroads in the 19th century."
With that kind of prognosis, it appears Monty -- who was roundly criticized at the time for dumping Nortel -- will have the last laugh.
Deborah Yedlin can be reached at 235-7483 or yedlind@theherald.southam.ca
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