Nortel-A Case Study from Inside the Technology Bubble

In other themes on this site, we have focused considerable attention upon the importance of proper financial statement analysis and share price analysis to aid prospective investors in their decision making processes. There are many examples of the perils of placing hard earned cash into unsound investments. Sometimes the risk is obvious and at other times it may be well disguised. Widely accepted attitude in the market insists the math of a 50-50 chance to earn 20% or 0% is a better investment than a 100% chance to earn 10%. In many of these instances, the allure of earning wealthy returns overshadows the truths of risk management, causing many an investor to quickly turn his attention from hopes of prosperity to minimization of loses.

A bull market is a difficult thing to assess objectively and even more difficult to invest in wisely. A complete example of this truth is found in study of the case of one great Canadian success story. A supposedly solid an investment as ever can be found.

Nortel Networks

Nortel is a world famous telecommunications equipment giant with a long history of success dating back to its formation in the late l800’s. In September of 2000, at the height of its business triumph, its market capitalization of $398 billion accounted for fully one third of all stock valuations traded on the Toronto Stock Exchange. The ingenuity and world leadership the company had displayed through its history made the stock a darling of investors world-wide.

Two years later, Nortel stock had taken a plunge to $0.47 per share from $124, as total capitalization dragged all the way down to $5 billion.

Though many investors might like to, it is impossible to pin the dramatic fall on any one factor. As is always the case when things go seriously wrong, a series of external events and internal activities come together at the worst possible time, and companies have to answer to the outcry of investors, many of whom never should have been caught there in the first place.

Originally part of Bell Telephone, the company became a major supplier of telecommunications equipment. It progressed steadily at a reasonable pace until, in the mid-1960’s, break-through technological advances with fiber-optics and work on digital transmission catapulted the company into a force in the communications networking business. They went on to set a goal of becoming a world dominating powerhouse in network development and infrastructure installations. Over that time, the company went through a series of structure and ownership changes, emerging in the late 1980’s as Northern Telecom, but most significantly, with the 1998 acquisition of Bay Networks through a stock transfer transaction which eliminated Bell Canada Enterprises (BCE) as a majority shareholder in the newly named Nortel Networks.

Nortel, under the leadership of CEO John Roth, went on a late 1990’s growth spree which saw the company take control of the digital communications market and grow to almost 100,000 employees. By some estimates, as much as 75% of the North American data transfer and internet market was carried on Nortel systems. Share prices rose dramatically and Roth was touted as Canada’s leading corporate executive of the year 2000. Less than a year later, Roth the hero stepped down from his position and entered into disgraced retirement.

In part two of this case study we will take a look at how Nortel went from darling to dismal in the eyes of investors.