Tuesday, June 19, 2012

Nortel Networks Downfall


Prior to joining Carnegie Mellon, I worked for a large defense company in Massachusetts.  In 2009, my office was moved to a new site – our firm was expanding into new office buildings at the Nortel Networks campus in Billerica, MA.  When I arrived, I noticed that less than half of the massive campus was still Nortel while other companies, including my own, were moving in.  The building I moved into was half occupied by my own company and half occupied by Nortel.  I would often meet Nortel employees in the café at lunchtime or elsewhere on campus.  At the time, I did not know much about Nortel and its woes.  However, armed with new knowledge, I decided to investigate Nortel’s downfall.

Nortel was one of the largest companies in the world in the 1990s and Canada’s most successful corporation. However, by 2009, it was trading at $.18/share and eventually filed for bankruptcy.  Billions of dollars of shareholder value was lost over the years.  Though there was an accounting and fraud scandal that engulfed the company in its final years, the articles below identify a host of other problems for the once great Canadian tech company, mainly in corporate strategy.

The most blatant of these missteps was in Nortel’s strategic financial investments in the late 1990’s and early 2000’s.  Nortel made a host of bad acquisitions in during the dot com and telecom bubbles.  These acquisitions were made in order to reach lofty annual growth goals of 30-35%.  By the mid-2000’s, Nortel found itself engulfed in scandal and hemorrhaging money.  They were unable to develop a strategy that would allow them to compete with new low-cost competitors such as Huawei, and found themselves competing with out-dated technology.

Nortel Networks’ failure can be best understood utilizing Carroll and Mui’s article Seven Ways to Fail Big.  Nortel seems to have touched upon 4 (or 5) of the 7 criteria listed in the article: The Synergy Mirage, Faulty Financial Engineering, Staying the Course, Wrong Technology Bets, and possibly Roll-up.  With all of these issues, the firm was destined to be in unenviable shape.  However, I was left wondering how much of an effect the financial and accounting scandals had on the company.

Does anyone believe that Nortel Networks would still be around today if it had not been for these scandals?  Would the company be profitable despite all of its strategic missteps?

Ref:
Tedesco, Theresa. Nortel trial to open old wounds.  <http://business.financialpost.com/2012/01/14/nortel-trial-to-open-old-wounds/>

Wahl, Andrew.  The good, the bad, and the ugly: Nortel Networks. <http://www.canadianbusiness.com/article/14895--the-good-the-bad-and-the-ugly-nortel-networks>

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