Nortel: the end of an era

Maren Bennette

Maren Bennette first became aware of Northern Electric, as it was then known, in 1974 when he moved to Montreal, Quebec to work for a small competitor of the Canadian industrial powerhouse. The city, the then headquarters of the company, was awash with Northern buildings and people. It was and has been until just 6 years ago, the Canadian success story par excellence. So what, Bennette asks, went wrong?

Having led the world in digital communications switching technology, with carrier and enterprise customers queuing up to buy their products and services, Nortel, as the company became known, seemed to do no wrong. At its zenith in 2000, driven by the Y2K system upgrade bonanza, global revenues were in excess of US$30 billions, more than 94,500 people were employed world wide and the company’s CDN$398 billion market value accounted for a massive one third of the value of the entire Toronto Stock Exchange. Now, less than 10 years later, Nortel is being sold off piece meal to foreign competitors and 10’s of 000’s of employees and pensioners around the world are fearing for their economic futures. Canada’s hi-tech hero is now a zero.

No one can doubt that Nortel has a long and illustrious history of innovation and success, as can be seen from the timeline below. Indeed, Canada was where the telephone was invented exactly 100 years before I arrived there, so the company’s track record was well established. From the early 1970’s until the turn of the 20th century Northern Telecom – subsequently renamed as Nortel – was the leading global supplier of telecommunications switching systems for telephone companies and enterprise users. The company even foresaw the time when voice, video and data would all ride over the same technological platforms, though it must be said that their Digital World concept launched in 1976 was based on circuit switching rather than IP packet switching.

Beginning of the end.

Nortel didn’t ignore IP, though. Indeed in 1998 it made what was undoubtedly the

boldest move in its 103 year history, when it acquired Bay Networks for US$9.1 billion in stock. Hailed at the time as the communications business ‘deal of the century’, it was supposed to cement the manufacturer’s position as the leading global supplier of networking equipment, melding voice circuit and data packet switching technologies together in one swift stroke.

But many industry observers, including myself, believe that this deal was the start of the downfall. With 20-20 hindsight the deal was perhaps doomed to failure from the start. The marriage of ‘civil service’-like Nortel senior management based in Canada and Californian hitech hippies was one which was always likely to end up in tears. And it did: the newly-enriched Bay engineers and marketing gurus left in droves, joining arch-rivals such as Cisco and 3Com where they were welcomed with open arms and ‘golden hello’ deals that made them richer still.

If working for another big company didn’t appeal, there were hundreds of Silicon Valley networking start-up companies where they could be big fishes in small ponds, investing their money in return for significant share ownership in the hope that yet another company would come along and buy their new employers and make them even more wealthy. They were living the American capitalist dream.

But perhaps the real beginning of the end was actually when Nortel failed to acquire a company. Later that same year Nortel missed the chance to buy Selsius Systems, one of the leading IP telephony companies of the time. The far more nimble Cisco snapped up the Dallas based startup for a mere US$116 millions in stock, a deal that has led to Cisco becoming the world-wide enterprise voice communications market leader, resting that title away from the company that had come looking for a fight on Cisco’s home turf. Some say that Nortel would have bought Selsius and closed it down, to ensure that IP telephony didn’t gatecrash the Y2K party, but perhaps Nortel would have done what they did with digital switching – steal a march on all their competitors once again. If they had, today’s sorry story could have been so very different.

The human cost of hubris.

When Nortel filed for bankruptcy protection in January, it was particularly hard on the employees and pensioners of the company. Some could boast that three generations of their family had served Nortel well. In Canada employee Ray Hounsell said, “I spent 38 years in Nortel,” he says. “My dad spent 36 years in Nortel. And his father, my grandfather, spent 30 years in Nortel. Needless to say, it has been extremely difficult.”

Now, Hounsell is preparing to get in line with the rest of Nortel’s creditors—the bondholders, commercial lenders, and suppliers—for a piece of the company’s rapidly diminishing assets. At best, he figures he’ll get 70 per cent of the money he was promised, while banks that made secured loans to the company will likely get back every penny. Other former Nortel employees won’t be as lucky. According to some estimates, ex-Nortel employees entitled to severance payments and employees on long-term disability will get back just 10 per cent of the money they are owed.

If Hounsell had been living in Britain or the U.S. he wouldn’t have to worry so much. Both countries have funds that protect the pensions of workers when their companies go under. Here in Britain, workers can get up to £27,800.00 annual pension paid by the government – out of our tax money. Not that that will satisfy one British Nortel employee this writer has heard of. Having

Mike Zafirovski is appointed
CEO on October 17th 2005

worked for STC since 1969, John (as I shall call him) now has 40 years service under his belt and was due to retire early in 2010 with a substantial tax free lump sum and £60,000 a year for life. He and his wife ‘Mary’ had made many plans for a long, wellfunded retirement. Now he’ll have to go cap in hand to the government not only for the maximum protected pension, but also for the £5,000.00 tax payer funded government severance allowance which is the maximum he can claim because Nortel reneged on employee redundancy payments. The tax-free lump sum John and Mary were looking forward to has gone up in the smoke of the bankruptcy bonfire of the vanities.

NORTEL TIMELINE

1874 Alexander Graham Bell invents the telephone in Brantford, Ontario.

1882 Bell Telephone Company of Canada branches into manufacturing, in Montreal.

1895 The Northern Electric and Manufacturing Company Limited is incorporated.

1937 Northern develops the number “205” feature telephone, predecessor of corporate phones.

1950 Northern begins developing electromechanical telecommunications switching systems.

1975 Northern ships the SL-1, the first digital switching system in commercial service.

1976 Northern Electric changes its name to Northern Telecom.

1979 Northern launches the DMS-100, a digital switch that supports up to 100,000 lines.

1989 Northern acquires Britain’s STC.

1995 Northern Telecom becomes Nortel.

1998 Nortel acquires Bay Networks, an industry leader in worldwide IP networking.

2000 At its peak during the tech bubble of 2000, Nortel reported about $30 billion of annual revenue and employed over 94,500 employees. The company was valued at almost CDN$400 billion which represented 1/3rd of the value of the Toronto Stock Exchange composite index.

2001 Nortel cuts 2001 earnings and sales forecast in half after the Dot Com tech crash.

2002 Nortel plans to cut 3,500 jobs and sell more assets as it pares its revenue forecast.

2003 Nortel reports a quarterly profit in October, but says it will restate results for last 3 years.

2004 Nortel says it will restate results for a second time. Later that year 3,250 more jobs go.

2005 Nortel restates its results. Mike Zafirovski is appointed CEO on October 17th.

2006 Nortel and Microsoft announce their Innovative Communications Alliance.

2007 Nortel slashes 3,900 jobs and shifts 1,000 positions to lower-cost locations.

2008 Over the year 3,400 more jobs are lost. A $3.4 billion loss is posted in the autumn quarter.

2009 Nortel files for Chapter 11 bankruptcy protection in the United States in January. In June, the company announces that it will be broken up. Mike Zafirovski departs in August. Ericsson wins the auction for the CDMA wireless assets in July and Avaya wins the Enterprise Solutions business in September, a purchase which is to be reviewed by the Canadian government.