Expanding through acquisition

What ever did happen to financial statement analysis during this market? Health of a company somehow became interpreted as the percentage of market or market share the company possessed. There is not any quantitative, financially correct value to place on such a figure, but in a time when consensus had it that the entire market sector would expand uninterrupted for an infinite period of time, owning almost anything in that market would eventually be a good thing. Much of Nortel’s growth was accomplished through acquisitions paid for with over valued shares. In 2000 alone, Nortel bought out 11 companies for $20 billion. The simple objective was acquisition of market share. Keep in mind management was carrying on with this course even at the same time BCE was offloading Nortel.

Even when the market is moving upward, management should never have a fixation on the stock market and a motivation to make business decisions with the purpose of elevating their share prices. Nortel did so knowing that such a goal has no connection with the financial health and future of the business. In a fast moving business sector economy, a company has to be quick to re-act. Nortel missed the reality that was closing in on them.

Current ratios would have indicated to any investor not swallowed up in the tech bubble frenzy that the company was not properly positioned to withstand the financial strain of even a short term decline in orders. Long before the crash, investors didn’t care to notice that if need be, the company did not have the financial qualifications to float much more than a junk bond issue. Investors making proper analysis of the sector would have noticed failures of smaller, less stable competitors was due more to market saturation than competitive disadvantage. Cash flow analysis would have shown diligent investors dwindling forward sales contracts were the result of primary customers cutting or withdrawing orders.

Still, everyone was buying them so everyone bought them.

Then the crunch came down hard. The bottom line for 2001 was brutal; a loss in excess of US $27 billion.

Today, Nortel continues to claw its way back and appears to have won the fight to survive. Some investors never did recover.