Nortel Trips Again

Nortel Trips Again

FOR ONE shiny six-week period, the dream was back. More modest perhaps than the Freedom 35 fantasies that had fuelled the last stock-buying frenzy, but still worth salting away in the old RRSP. Then, in a quick run of three trading days, Nortel Networks Corp. once again shook the investing world. North America's largest manufacturer of telephone equipment and Canada's fabled stock market gorilla announced it would be delaying a key regulatory filing in the U.S. and restating its 2003 earnings. A few days later, it suspended - with pay and extremely little explanation - chief financial officer Douglas Beatty and controller Michael Gollogly. That sent the stock plunging 19 per cent, its biggest one-day decline in over a year, and ended the brief run-up that had seen Nortel overtake the Royal Bank - for the second time - as Canada's most valuable company.

Déjà vu? Many Bay Street smart guys did not seem overly perturbed by Nortel's new troubles. In the immediate aftermath, Merrill Lynch maintained its "buy" advice, as did Scotia Capital, and New York-based Morgan Stanley suggested any changes to reported results will likely be minor. The investing public, however, seemed gobsmacked. "Ordinary investors were just throwing their hands up," observed Toronto financial analyst Ross Healy. "They were saying, 'These guys can't organize anything without goofing it up.'"

The stock's collapse, combined with the whiff of potential scandal, is threatening to undo much of CEO Frank Dunn's cleanup work on Nortel. He took over in November 2001, in the midst of the great death spiral during which share price went from a high of $124.50 in July 2000 all the way down to $0.67 in October 2002. But since then the telecom giant has been slowly climbing out of its hole. It shed nearly two-thirds of its workforce, signed a big Internet deal with Verizon in the U.S., and has been growing at a healthy rate, analysts say, of about 10 per cent a year.

But then, in January, it became caught up in the old hoopla. Analysts gushed like teenyboppers when Nortel posted its first profit - this was RRSP season, after all. Following three ugly years, the company's stock suddenly surged to a high of $11.94 at the end of January. Dunn tried to dampen expectations, and last week's suspensions may be seen as an extension of this: a painful, high-profile if awkward first step on the way to blue-chip status in the era of Enron and Martha Stewart. Indeed, Healy, chairman and CEO of the independent firm Strategic Analysis Corp., is inclined to be cautiously charitable toward Nortel's brass. He feels the restatement probably has more to do with Dunn's desire to appear ultra-accountable than real balance-sheet problems. "If Martha Stewart can get hung for 50,000 bucks," says Healy, "then Dunn's going to want everything squeaky clean."

Still, it is highly unusual to suspend both the CFO and controller, a corporation's key financial checkpoints, and to delay a U.S. Securities and Exchange Commission filing. And Dunn, who was Nortel's CFO himself during the big tech meltdown in 2001, has had to do an about-face: on Jan. 28, he signed off on the fourth-quarter results that saw Nortel post its first (US$732 million) annual profit in six years. And now he's saying 'whoopsie'?

The accounting mystery is currently in the hands of an external law firm and internal auditors, and is not expected to be resolved for weeks. Word in some Bay Street circles is that the restatement is about "non-cash items," which can mean almost anything. They may be no big deal. But if they are part of a shaky reporting system - based on which the senior managers awarded themselves US$140 million in bonuses last year - that is not what today's investors want to hear.

Nortel booster Duncan Stewart, a tech analyst with Toronto-based Tera Capital Corp., is not so sure this tempest is all that minor. When a big company suspends its two senior accounting officers, "those are bad things," says Stewart. "I can't recall an instance where those things turned out to be trivial." Meanwhile, Nortel is dragging down Canada's resurgent tech sector, and tagging itself once more as the corporation of dashed dreams.

See also ELECTRONICS INDUSTRY.

Maclean's March 29, 2004