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More Crossed Wires at Nortel

By Roger O. Crockett and Steve Rosenbush Nortel Networks (NT) can't seem to shake its problems. Just as the telecom-equipment maker was putting two years of accounting woes behind it, two star executives walked out the door, raising questions about Nortel's direction and stability.

The company stunned observers on June 10 with news that Chief Operating Officer Gary Daichendt had resigned just three months after joining up. The Cisco Systems (CSCO) veteran came to Nortel, based in Brampton, Ont., with the expectation of succeeding Chief Executive Bill Owens, 65, analysts say.

But the two had different management styles and different views about the business, and that led to Daichendt's departure, according to Nortel spokesman Bill Durling. Chief Technology Officer Gary Kunis, who had left Cisco to join Daichendt at Nortel, followed his boss out the door.

SEEKING A TURNAROUND SITUATION. That parting of the ways leaves a huge management void at Nortel, which has been struggling with one crisis after another ever since the telecom market meltdown in 2000. Daichendt was brought in to focus on operations and assist Owens with strategy. Luring him was seen as a coup, since Nortel is trying to compete more directly with Cisco in the enterprise networking business.

Daichendt was drawn to Nortel because of his interest in helping Owens get the scandal-scarred company back on track. Owens had recently finished revising Nortel's books, going all the way back to 1999. But criminal probes related to accounting issues that arose during the tenure of former CEO Frank Dunn still are under way in the U.S. and Canada.

The 53-year-old Daichendt, a board member of Bible seminar group Walk Thru the Bible, told BusinessWeek in an interview earlier this year that he wanted to change the environment that led to the corporate scandals of the past few years. "I wanted a turnaround situation -- and something that needed a good dose of ethics. I'm very serious about it [the importance of ethics and integrity in business]," he said.

LONG WAY TO GO. It's not clear exactly where Daichendt and Owens clashed. But Owens has been remaking Nortel to focus on the government sector and to provide security services to corporate customers. He led the $448 million acquisition of Virginia-based PEC Solutions, a leading government IT-services company. And last December he struck a partnership with security leader Symantec (SYMC) that's intended to provide defenses against threats to Internet networks.

If Daichendt was puzzled by Owens' vision, he wasn't alone. Some on Wall Street think the acquisition of PEC, for example, pulls Nortel away from its core business of supplying telecom gear. Others understand that the CEO is looking for growth outside the volatile business of supplying telecom carriers.

But Owens has a long way to go. "Lucent is probably in a better position with the government than Nortel," says Standard & Poor's analyst Ken Leon. "Nortel doesn't have the [consulting and systems integration] skills or the professionals."

With Daichendt gone, Owens will have to dig into the business far deeper than expected. He was hired to be the steady hand needed to lead Nortel through the accounting nightmare that resulted in investigations by U.S. and Canadian securities agencies and a string of investor lawsuits. former Navy admiral, the CEO is respected for his calm leadership and disciplined ways. Many expected that after the release of the company's first-quarter financials on June 1, Owens' job would wind down.

TALENT-RETENTION QUESTIONS. Owens sure appeared calm and assured during an interview last week with BusinessWeek at the SuperComm trade show in Chicago. "Nortel had a challenging year," he admitted. "But I think we will have a good 2005." Owens wasn't available to talk about the executive departures.

Trouble is, with relatively little experience as a top telecom industry exec, Owens must now assume full responsibility for operations -- an area that isn't considered one of his strengths.

That worries analysts. Nortel has miles to go before it can seriously rival Cisco in the enterprise market. And as it struggled through its accounting mess over the past two years, it lost market share in the competitive wireless business. J.P. Morgan analyst Ehud A. Gelblum wrote in a report on the executive exits that "this is bad news for the company.... The departures raise serious questions about Nortel's ability to retain top talent, which we believe is necessary for the company to grow while reexpanding margins."

DRAMATIC REMEDIES. Nortel has had trouble meeting the goals Owens set. After rounds of cost cuts, expenses are still around 35% of revenues, according to telecom analyst Steve Levy of Lehman Brothers, despite Owens' plan to reduce expense margins to the low 30s. "The restructuring isn't getting the results they expected. I think they need to do more," Levy says. One option: Close some of the 30 research centers that Nortel maintains around the world.

Daichdent may have proposed dramatic remedies that the Nortel board wasn't prepared to accept. Owens has predicted that the telecom-equipment industry will consolidate over the next five years. But the two men might have had different ideas about what role Nortel will play -- as buyer, seller, or as corporate break-up case.

The COO's departure raises plenty of questions about the future. And it's a good bet that the drama at Nortel isn't over yet. With Peter Burrows in Silicon Valley

Crockett is deputy chief of BusinessWeek's Chicago bureau, and Rosenbush is a senior writer for BusinessWeek Online in New York

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