Nortel’s crash triggers an uproar over what Roth knew and when he knew it
PLUNGE FROM GRACE
Nortel’s crash triggers an uproar over what Roth knew and when he knew it
about: Nortel Networks Corp., the technology superpower he leads and why its financial oudook had suddenly soured so dramatically. Not my fault, said the cocky and defiant Roth. The swift downturn in the U.S. economy was to blame, he said. No one, not even Alan Greenspan, chairman of the U.S. Federal Reserve Board, anticipated the quickness with which it hit, said Roth. But to the question yelled repeatedly at him afterwards, as he marched stony-faced out of the Canadian Room of Toronto’s Royal York Hotel surrounded by a mob of cameras, microphones and reporters, Roth had no answer. “Why should we believe you?” they shouted. “Why would we believe you now?”
Atleast John Roth had the grace to ditch his planned speech to the Canadian Club—the one about globalization—and instead talk about the subject his well-heeled audience was anxious to know more
Nortel, one of Canadas most widely held stocks, is such a heavyweight, it often not only moves markets, but shuts them down as well. Witness the Toronto Stock Exchange, which has
had to halt trading in Nortel stock six times in the past four months because it couldn’t handle the volumes. Last week, the onetime highflier saw its share price close at $29.80, a level not seen since the summer of 1999. A neat $52 billion was sliced off Nortel’s market value after it shocked investors with news its first-quarter results would be worse than expected. So much worse, in fact, that Nortel was anticipating a small loss. But what really took a nosedive was Nortel’s—and Roth’s—allimportant credibility.
A vintage car aficionado who likes to equate his love of speed with the company’s hyper-fast fibre-optic systems, the 58-year-old CEO had seen his personal status soar as Nortel’s stock price swelled. Roth is co-chair of Canada’s E-business Opportunities Roundtable, a blue-ribbon assembly of industry captains; he is chairman of Ontario’s industry advisory board; he’s been granted coundess honorary degrees and CEO of the Year awards. And he has used his high profile to press the federal government to lower income taxes and address the brain-drain issue.
But shift into reverse for a second, and
go back to the middle of last summer. Nortel, one of the survivors of the burst technology bubble, reports stellar secondquarter results in late July amid much management optimism. The stock shoots to a high of $124.50. Then, in late October, third-quarter results come in at the low end of analysts’ ranges—which, for the tech sector, is not good enough. In just two and a half hours, investors shave $83 billion off Nortel’s value. As the tech slump worsens, the market hangs on Nortel’s every word. On Nov. 21, its executives say they are confident forecasts for the quarter and for 2001 will be met. In midDecember, they say it again. And a month later, when Nortel releases its fourth-quarter earnings, it makes the quarterly target, and reiterates bullish predictions for 2001.
And then, boom! On Feb. 15, down came the news that Nortel was slashing rev-
$67.25 Nov. i, 2000
Seeking to calm markets, Nortel makes an unprecedented promise of a 40-cents-a-share operating profit for the fourth quarter.
Two other factors indicated trouble would be on the way. When the tech-stock bubble popped in April, it meant the flow of easy money was drying up, leading companies, including Nortel customers, to re-evaluate their capital spending plans. And loans were tougher to obtain, as banks suddenly became concerned about their exposure to technology.
But last week, Roth insisted that Nortel’s order books were still filling up well into the new year—until clients had an abrupt rethink. “All of our customers are starting to adjust their budgets to take account of the realities of the very sharp downturn that the U.S. is experiencing,” he told the Canadian Club. With 60 per cent of its revenues coming from the U.S. market, Nortel is very exposed, he said.
For many analysts, however, there was a different exposure issue: what did Roth know and when did he know it? Just two days before releasing the earnings warning, Nortel closed a deal to buy the Zurich facility of its supplier, Ottawa-based giant JDS Uniphase Corp., for $4.5 billion in Nortel stock. Once the warning was out, the markets carved about $1.5 billion off that price, and set off an uproar over when Nortel realized its revenues were crumbling. JDS held meetings with its lawyers, and Nortel shareholders in the United States and Canada launched class-action suits. On top of that, Roth’s chief technology officer, Bill Hawe, left the company three days before the profit warning—an event not disclosed to in-
$71.55 OCT. 25, 2000
Stock plunges 26 per cent after disappointing third-quarter results and a low-end 2001 forecast of 30to 35-per-cent growth.
enue expectations in half; slashing an additional 6,000 jobs (on top of a previously announced 4,000); slashing profit expectations to the point it now expects to lose money in the first three months of2001. Down (boom!) crashed the share price, not to mention the TSE’s trading system.
Brian Piccioni is a high-tech industry analyst who has for months been a Nortel bear. Piccioni, of BMO Nesbitt Burns Corp. in Toronto, says the writing has been on the wall for anyone to see, including John Roth. “I was almost dysfunctional for the last three months because it was like someone was defusing a bomb,” says Piccioni. “You’re just waiting for it to blow.” While he was not surprised by Nortel’s warning that revenues would be lower than expected, he was taken aback by the loss warning. “I thought, because they were so adamant reiterating their guidance for the first quarter, that they had it in the bag,” Piccioni said.
The biggest clue that business would slow for Nortel was the performance of the company’s competitors, customers and suppliers. Already beset by management turmoil, Lucent Technologies Inc. of Murray Hill, N.J., delivered the first of I several profit warnings in October. San Jose, Calif.-based I Cisco Systems Inc., the other giant telecom player, gently let « the market know in December that business was slowing.
FEB. 16, 2001
The stock plummets 33 per cent after Nortel slashes its 2001 growth forecast to 10 per cent.
Nortel announces layoffs of 4,000 workers globally, but denies there is any connection to fears of recession.
vestors for over a week. As well, in a Web-cast on Feb. 12, Roth spoke to clients of RBC Dominion Securities Inc. about the slowdown in spending by its customers. All of these events have caught the eye of the Ontario Securities Commission, which is reviewing the company’s disclosures of the past weeks.
Roth, who masterminded Nortel’s right-hand turn into the New Economy business of Internet-based data networking and away from phone switches and other gear, was considered a superb captain during the good times (and in Nortel’s case, boy, were they good). Now, as conditions worsen, Roth—who insisted he will still be CEO in a year— must prove to an increasingly skeptical market he can be as strong a leader in bad times. EDI
After a week of controversy, the stock closes down 76 per cent from its July peak.
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