Nortel: New Boss, Same Problems

CEO Frank Dunn needs to make some headway, fast

Once, eight years ago, when Nortel Networks Ltd. (NT ) executive Frank A. Dunn's team was losing a recreational hockey game, his frustration boiled over. During a scramble for the puck, Dunn, then about 40, slammed an opponent into the boards. Dunn wrenched his rival into a headlock, nearly starting a brawl with the other team, according to Tom Manley, a former Nortel executive who played hockey with Dunn. "Frank is fiercely competitive," says Manley. "Whether he's at work or playing a game of pickup hockey, he doesn't like to lose."

Now, as Nortel's CEO, it will take all the ferocity that Dunn can muster to turn around the troubled Canadian telecom-equipment maker. Dunn, who had been a little known chief financial officer for two years, took over last November from predecessor John A. Roth, who retired amid a telecom-industry meltdown. More than a dozen telecom companies have gone bankrupt as capital spending was slashed 11% in 2001 and an additional 25% this year, says Lehman Brothers Inc. That has wreaked havoc on all the telecom-equipment makers. Nortel lost $4.5 billion in 2001, excluding special charges, after net income of $2.5 billion in 2000. Overnight, the future of Canada's most important company was laid on Dunn's shoulders.

When the switch was made, it seemed as if Dunn didn't have enough leadership brawn for the job. He had never run a business before. He had rarely visited Nortel's customers. And in a company whose future depends on cutting-edge technology, he was no techie.

Dunn seems to be learning fast, though. In six months, he has taken the right steps to stave off a crisis. He has cut 14,500 jobs from the 60,500 on Nortel's payroll when he took over. On May 28, he announced plans to try to sell the Nortel unit that makes parts for optical Internet networks, shedding an additional 3,500 workers. His goal is to cut costs to the point where Nortel can break even with quarterly revenues of just $3.2 billion--something he expects to achieve in the fourth quarter. Analysts have their doubts, though. "They can get to breakeven by cutting costs. But given the environment, there's still risk they could miss," says Conrad W. Leifur of U.S. Bancorp Piper Jaffray. Leifur doesn't expect Nortel to turn a profit until the third quarter of 2003.

Even while he slashes away, Dunn is spending on two key product areas: optical gear for corporate customers and next-generation wireless systems. Both are expected to rebound more quickly than other telecom gear. Spending on wireless data-networking gear, for instance, is expected to grow by 15% over the next two years, to $36.9 billion, says Deutsche Bank. Dunn set R&D spending at 20.4% of sales in the first quarter, up from 16.6% a year earlier. "The financial health of Nortel is critical," Dunn says. "But if you don't move it on multiple fronts, you will fall."

His critics agree with his cost-cutting strategy, but they question his ability to make Nortel an industry leader again. He has not spelled out a grand vision that demonstrates how his investments in R&D will vault the company beyond rivals who are targeting the same markets. "That is a difficult task for Frank because he didn't grow up on the operational side," says telecom analyst Mark Lucey of Toronto's TD Securities.

Dunn insists he's up to the turnaround job. "One of the things that leadership's all about is not worrying what all the [critics] in the world are thinking," he says. And board members say what he may lack in experience and technical knowhow is outweighed by his financial acumen, competitive fire, and unwavering loyalty. "It's not a time for a visionary," says Lynton R. (Red) Wilson, chairman of Nortel's board. "We thought that Frank was the guy with the right kind of skills."

The immediate challenge is to keep the company from running short of money. Although Nortel has more than $3 billion in cash, it is saddled with $4.8 billion in debt and is likely to burn $2.1 billion this year and $1.6 billion in 2003, says UBS Warburg. Credit agencies Moody's Investors Service and Standard & Poor's in May cut Nortel's rating to junk status, making it harder to raise money. If Dunn doesn't get Nortel on a better financial footing by the end of this year, he may have to raise cash or find a buyer, says Bear, Stearns & Co. analyst Wojtek Uzdelewicz. "Nortel has liquidity for now, but they're burning a lot of cash," he says. "They have to do something."

Dunn denies he's seeking a merger. "I would be a stupid executive and businessman not to keep my eyes open," Dunn says. "But am I looking to sell Nortel? Absolutely not." Indeed, former Nortel executives say Dunn, a Canadian, was chosen in part because he would be averse to selling out to a non-Canadian bidder.

Still, there's no certainty that his medicine will heal the company. By some measures, it's in worse shape now than when he took over. Sales of $2.9 billion in the first quarter, ended in March, were just half of the $5.8 billion reported a year earlier. That's a far cry from the 2% increase rival Cisco Systems Inc. reported and worse even than the 34% sales dive by troubled rival Lucent Technologies Inc.

Until now, numbers had always worked to Dunn's advantage. He grew up in Montreal watching his parents manage the books of their small business. He excelled at math and science at Chomedey High School outside Montreal. By the time he enrolled at Montreal's McGill University, his major would be a no-brainer: finance. He had other interests, too, especially football. His intense play as a receiver helped the McGill team make the 1973 national championships--which they lost. Dunn graduated in 1976, with a degree in finance, and immediately joined Nortel.

The scrappy young exec worked his way up the finance ranks in every division of the company. His big break came in 1991 when he became finance chief for rising star Roth, in the wireless business. Dunn became CFO after Roth was appointed CEO. "I think of Frank as a focus guy," says Wes Scott, Nortel's former chief corporate officer and Dunn's onetime boss. "So he would come to meetings armed with facts."

Sometimes Dunn's facts have been wrong, however. He shares responsibility with Roth for overselling Nortel's prospects. Dunn, as CFO, repeatedly seconded Roth's assertions throughout late 2000 that the business was healthy--even a few weeks before it announced a $385 million loss in the first quarter of 2001. "In the go-go days, they were incredibly arrogant," says analyst Shawn Campbell of Nortel shareholder Northern Trust Corp. Dunn says he couldn't have predicted the downturn.

The sliver-haired CEO has a long history of being super aggressive. He's known to ride people until they deliver results. When Nortel completed the first billion-dollar financing deal, for customer Sprint PCS Group, in the late '90s, he pushed his team mercilessly, recalls Bill Kerr, former vice-president for finance. Dunn called Kerr many times a day, prodding him to fashion the $1 billion loan--which helped land the sale.

These days, Dunn is putting the personal touch on Nortel's relationships with customers. He spends 70% of his time on sales calls. He repeatedly flew to the London headquarters of European wireless operator mm02. His attention helped Nortel land a $560 million contract early this year.

It's not clear whether Dunn's customer schmoozing will gain Nortel enough momentum. Despite the fact that he paid three visits to SBC Corp., Lucent won a coveted contract in May to sell SBC key voice-over-Internet technology. Dunn may have to rack up quite a few frequent-flyer miles before he gets Nortel back on the growth track again.

By Roger O. Crockett in Chicago

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