Annual report in 2007 promises optimistic future, but it
was already too late to save Nortel
                                                                         
                                  

                             
Matt Desch, now CEO of Iridium: In the 1980s and 1990s Nortel
had "technical innovation, global culture, and strategic savviness" 
                      
                        
Nortel will be missed — most of all by the people who worked hard in the company and made it one of the most enterprising vendors in the business. The $4.5 billion that five companies in the telecoms and IT business have agreed to pay for its intellectual property is huge, more than four times what even Nortel’s break-up team expected — and that shows what an innovative place it was.
Matt Desch, now CEO of satellite operator Iridium, was a director of Nortel in the late 1990s. He is listed in the 1999 annual report as president of service provider solutions for Europe and Asia.
“Those of us who were fortunate to work at Nortel during its heights in the 1980s and 1990s recall the technical innovation, the strong global culture, and strategic savviness that pervaded the company and contributed to taking its position from niche player to market leader in many areas,” he tells Global Telecoms Business today.
Michael O’Hara, chief marketing officer of the GSM Association now, had a similar role at Nortel until April 2002: “I worked for Nortel for 14 years and had a great experience. Nortel was a proud technology company with strong Canadian roots that had built a great business around digital switching, both carrier and enterprise, and then extended that leadership into wireless and optical networking,” he recalls.
“I remember the late 1990s and early 2000s as a time of great excitement as Nortel acquired a number of companies to compete in the internet era.”
One of those acquisitions was the former Standard Telecommunication Laboratories in the UK — the place where, in early 1966, optical fibres were demonstrated for the first time. Ironically, Charles Kao, one of the inventors of optical communications at STL, won the Nobel Prize for physics in 2009, just as Nortel was crumbling to dust.
Five companies in the industry banded together to buy Nortel’s patents, the company’s last remnant after everything else was sold off — see table, below.
A consortium of Apple, EMC, Ericsson, Microsoft, Research In Motion and Sony grouped together to keep out Google, which made an initial bid of $900 million for the patents. 
                                     

                               
CSO George Riedel: pleased at the outcome of the auction
                           
                         
Nothing for shareholders
                                                        
It’s almost the last act in the break-up of Nortel, which went bankrupt in early 2009. Nortel’s common shareholders will not benefit from the proceeds of any of the sales. At its height, Nortel’s shares represented a third of the value of Toronto Stock Exchange.
George Riedel, whose title is chief strategy officer and president of business units, but is one of the remaining three senior executives in the slimmed-down Nortel management team, said: “Following a very robust auction, we are pleased at the outcome of the auction of this extensive patent portfolio. The size and dollar value for this transaction is unprecedented, as was the significant interest in the portfolio among major companies around the world.”
Indeed, the sum outstrips the $3.2 billion Nortel has raised by selling all its other activities put together. According to the terms of a court order when Google first made its stalking-horse bid of $900 million, the search company will receive $25 million for losing the auction.
According to Nortel, the sale includes more than 6,000 patents and patent applications spanning wireless, wireless 4G, data networking, optical, voice, internet, service provider, semiconductors and other patents. The extensive patent portfolio touches nearly every aspect of telecommunications and additional markets as well, including internet search and social networking.
After that, there will be little to do at Nortel’s remaining offices but turn the lights off and lock the door. 
                                  
                                  
Centre for innovation 
                                  
But what went wrong with Nortel? Dan Warren, senior director of technology at the GSM Association, recalls: “Nortel had always been a centre for innovation — hence the interest in the IPR portfolio — but consistently in the last 10 years struggled in the transition from innovative thinking to compelling product.”
Georgia Hanias was a marketing project manager for the company in the late 1990s, working in Canada, the US and the UK. Now a director of Cyrano Media, she says: “Everything began to go downhill when Nortel went after Cisco with the purchase of Bay Networks.” That deal cost $9.1 billion in June 1998.
John Roth, then CEO of Nortel, said in August the same year: “We have successfully completed the merger with Bay Networks at an accelerated pace — in internet time.”
Avaya bought pretty much the same business from Nortel’s administrators in December 2009 for one tenth what Nortel paid for it.
Hanias says now: “They thought they could compete with everyone. We all know now that they couldn’t — and they paid a high price as a result.”
Warren notes: “There was always a feeling that Nortel could compete with the bigger names and that Nortel regularly punched above its weight. Equally though, in bad times — such as the tech bubble bursting in 2000 — things went sour very quickly.”
And it was the internet crash at the beginning of the century that started the decline. The company lost value quickly: its shares were worth $398 billion in September 2000, but only $5 billion two years later.
Roth left in 2001; his successor was Frank Dunn, former CFO, who was fired in 2004 and charged with fraud, along with two colleagues, four years later. Dunn and others “inappropriately changed Nortel’s accounting policies and/or practices several times during the 2000 fiscal year, either to recognize revenue prematurely or to defer the recognition of revenue to a subsequent period”, alleged the Ontario Securities Commission. 
                                  
                                  
Inappropriate accounting 
                                  
From 2003 onwards Nortel had to restate previous earnings figures, admitting “inappropriate accounting practices and lack of internal controls”. The US Securities and Exchange Commission is also involved in litigation against Dunn and colleagues — and their cases are still not resolved.
Mike Zafirovski, the ex Motorola CEO who took over as CEO in 2005, was continually optimistic. He wrote in the 2007 annual report: “We are on a multi-year journey to rebuild our company the right way. ... Our theme for 2008 is simple: to accelerate. There is a true sense of momentum we have in driving results; a tenacity that is building a high-performance culture across Nortel. Our energy and mindset in pursuing our objectives is truly contagious.”
But it was too late. The company never regained equilibrium, and staggered on until early 2009 before seeking bankruptcy protection.
Desch says today: “Before it lost its way ... the company was a fantastic place to grow up in the telecom business — and it probably spawned more technology, start-ups and smart business people running companies today than almost any other big similar telecom manufacturer. I know it spawned a lot of friendships and pride in what we created and accomplished, and a lot of disappointment and even anger at what was lost in its final 10 years.”
O’Hara adds: “Although the company has gone, I know that Nortel alumni will continue to find leadership roles in the industry in the future. That is the real legacy of a great company.”
Warren notes that: “It could be argued that Nortel product was in some cases ahead of the market in offering single platforms that performed multiple, consolidated functions, but these ultimately resulted in prices that were higher than was acceptable to the market for the individual functions that customers wanted at that time.”
Hanias comments: “The demise was sad for a lot of people, and it could have been avoided if the company focused on its core competencies instead of trying to compete in all these different business markets.”
Ultimately, says Warren, this caused Nortel to lose market share — and mind share. He adds: “The thing that stayed constant through all of the ups and downs was the quality of the technical staff and the high level of innovation, and it is that which means I look at my time at Nortel with fondness, and feel sad that Nortel has finally turned off the lights.” GTB
                                  

* Dates may refer to Nortel’s acceptance of a bid or to the completion of a sale
† Price is as announced or as later published