What happened and how did it all go wrong?
Nortel experienced much of its corporate expansion and nearly all its share price growth during the time of an exuberant bull market. This was a period in time when companies engaged in the business of new communications technologies in general and internet business in particular, ran through a five to six year period of fevered expansion and wildly escalating stock prices that seemed destined to continue without end. It came to be known as the “technology bubble” or “dot-com bubble”.
Market bubbles are not a new phenomena. They have popped up from time to time throughout history, always the result of a bold psychology that causes speculators to forgo conservative analysis and through free spending, insist on driving the price of already inflated share prices ever higher. There is also the corporate side of the bold psychology scenario. Leaders of the businesses involved undertake a willingness to ignore standard business models in an “at any cost” drive to attain market share.
Nortel and those who invested in it were not alone in this rise and fall, but the Nortel case was one of the most dramatic. Early in the bull market, the NASDAQ composite index which is the most reliable measurement of the market for technology stocks, hit its 37th consecutive new high on July 19, 1995, closing at 1005.89 points. The technology, media, and telecommunications bull was well on its way. On March 10, 2000 it reached its all-time-high of 5048 when the bubble burst. Over the next 35 days, NASDAQ stocks plunged to 3321, April 14, 2000. Right there, riding the crest of the technology sector boom, Nortel experienced one 15 month period from November 1998 to January 2000, when shares gained 355% without the company ever having made a profit.
There is an amazing lesson here that in retrospect is easily seen, but should have been heeded by giddy investors of the time.
One big move by BCE made just before the crash, underscores an interesting point.
At the same time John Roth was winning accolades running Nortel, BCE chief Jean Monty was being heavily criticized for being too conservative and slow-moving for the Internet Business Culture. Monty got the last word in the first week of February 2000 when he spun-off the BCE stake in Nortel through a series of transactions that amounted to a tidy conversion to liquidity of $4 billion on the BCE balance sheet. In the deal, BCE shareholders were offered a .78 share in Nortel for each share of BCE stock they owned. At the time, media reported the deal to be a $73 billion windfall for the 500,000 shareholders involved. Remember this move came about only five weeks before the bubble popped for Nortel. All the signs were there, but still the skewed psychology of investors chose to go with the rising NASDAQ right to the end.
In the conclusion to the Nortel case study we take a look at what it means for a company to grow by recklessly acquiring other firms.