Analysis: Nortel may need radical change
By PATRICK BRETHOUR and SIMON TUCK
From Thursday's Globe and Mail
John Roth is opting for nine months of bolt-tightening at Nortel Networks Corp. instead of a radical overhaul of the struggling communications equipment maker.
"The need for dramatic change in the portfolio has passed," Mr. Roth said recently, characterizing his plan to return Nortel to profitability by the time he retires in April as a "hunkering-down" approach.
But analysts say more radical measures may be needed to snap Nortel out of its tailspin, including a merger or a far-reaching retrenchment.
Each of those radical approaches carries its own baggage, not the least of which would be a reversal of Mr. Roth's four-year push to transform Nortel into a company that competes across the entire breadth of the communications equipment market.
Mr. Roth has ruled out a Nortel-sponsored merger for the moment, saying last Friday that he was not considering a sale of the company.
But as Nortel's share price continues to decline — the stock dropped 54 cents to $12.30 Wednesday on the Toronto Stock Exchange — the Brampton, Ont.-based firm becomes an ever-cheaper target. "I could see someone taking a run at them just because they're cheap," said Ian Angus, president of Angus Telemanagement Group Inc.
Much of the merger speculation has centred around Nortel's arch-rival, Cisco Systems Inc. of San Jose, Calif. One source said a major U.S. brokerage house was invited by Cisco executives recently to present an argument about why the firm should bid for Nortel.
Meanwhile, a rumour was circulating around Bay Street Wednesday that Alcatel SA of France, another Nortel competitor, was buying Nortel shares.
Alcatel is already in the market for a North American partner: Witness its talks with Lucent Technologies Inc. that collapsed late last month.
But most analysts said it's unlikely that the French company would be in a position to acquire Nortel. The two companies, as measured by market capitalization, are virtual equals.
Another candidate being bandied about is Sunnyvale, Calif.-based Juniper Networks Inc., a much smaller player than Nortel, Cisco or Alcatel. Analysts say a combination of the two companies could fall short of an outright merger and build on the partnership between the two companies — especially if Nortel moves to aggressively reduce the range of its business.
An analyst who did not want to be identified said Nortel needs to withdraw from older markets such as private-branch exchanges, which are computerized telephone switches. The analyst also said Nortel should look at scrapping products for the so-called 3G wireless networks that are years away from being a full-fledged market.
And the analyst said it is time to concede victory to Cisco in the enterprise market, where individual businesses rather than huge telecommunications carriers are the customers. "The enterprise business is over for Nortel."
The verdict is far from unanimous that Nortel needs to reduce further the scope of its product portfolio. "We've got a company firmly focused, in terms of its core business, on tomorrow's technology," said Iain Grant, managing director of Yankee Group in Canada.
Mr. Grant is one of several observers who say there is one radical change that is needed immediately: how Nortel manages its image among investors and customers.
He said Mr. Roth's retirement plans are particularly damaging to any effort to convey a sense of stability at Nortel; the CEO should put his retirement plans on hold.
And Mr. Angus said the day-to-day message from Nortel needs to be carefully constructed, pointing to Mr. Roth's statement last week that Internet traffic is declining as an example of what not to do.
The head of a major Nortel customer, Qwest Communications International Inc., went out of his way to condemn Mr. Roth's statement in a conference call with analysts this week. |
