Nortel: Desperately Seeking Credibility
One misstep, maybe two, shareholders could have overlooked. But on Nov. 11, William A. "Bill" Owens had to 'fess up to his third serious slip since taking over as chief executive officer at Nortel Networks Corp. (NT ) last April. Just weeks earlier he had told investors that Nortel would deliver its restated financial reports to the Securities & Exchange Commission by mid-November, but at the crack of dawn on the 11th, Owens said the company would once again delay filing the documents. It was the third time in as many months that Owens had missed a deadline he had publicly pledged to meet.
The blunder sent Nortel's shares tumbling 15%, to $3.03, over the next 48 hours. "Owens' management pattern is pretty much inexplicable," says Duncan Stewart, a partner at Nortel shareholder Tera Capital Corp. "This kind of flip-flopping is not reassuring to shareholders." Owens said in an e-mail to BusinessWeek the delays have been caused by "the increasing complexity and scope of the work as it progressed."
Nortel's future may depend on whether Owens can quickly change his reputation with Wall Street. His next opportunity will come Jan. 10. That's the latest deadline for when the Brampton (Ont.) telecom equipment maker says it will file financial restatements. Even then, all Nortel is promising for that date is that it will "commence to file" audited reports going back to 2001.
No question, Owens inherited a mess. Nortel rose to prominence in the late 1990s by making fiber optic gear to transport loads of data over the Internet. But it was subsequently hit hard when demand for Internet equipment slumped. Revenues tumbled from $30.2 billion in 1999 to an estimated $10 billion in 2004. Even worse for its reputation was the dismissal in April of former CEO Frank Dunn, who the company said had been "terminated for cause." Now regulators in Canada and the U.S. are investigating whether he manipulated Nortel's financials to generate bonuses for himself and other employees. Dunn declined to comment.
But nine months after Owens arrived to set Canada's leading technology company back on track, it's arguably in worse shape than when he arrived. Revenues for 2004 are expected to have dropped 1%, to $10.2 billion, according to Bear, Stearns & Co. (BSC ) Revenues for this year are expected to climb 4%, but that's behind the 7% forecast for rival Lucent Technologies Inc. (LU ). The reason is largely that Nortel lags behind its peers in selling communications gear to corporations and wireless equipment to phone companies.
Nortel's accounting troubles are beginning to contribute to the revenue difficulties as well. A month ago, Cingular Wireless LLC announced the three suppliers for its third-generation wireless network, and Nortel, long one of the company's top suppliers, was not among them. While many factors were considered, Kristin S. Rinne, Cingular's chief technology officer, notes that "financial viability is something you look at." Nortel concedes its accounting issues have cost it business but says the effect is temporary.
Now, even as he strives to complete Nortel's restatements, Owens is trying to focus the company on promising growth areas. Besides targeting wireless and corporate sales, Owens wants to tap the steady needs of government. The former U.S. Navy Admiral and top Defense Dept. politico is betting that his experience in Washington will help Nortel pull business from the Beltway. The company is also beefing up its resources to address corporate concerns about tech security. "No one is better prepared to do that today than Nortel," Owens said on a recent conference call.
At stake may be more than Owens' reputation. If he fails to get Nortel back on track or, heaven forbid, misses the Jan. 10 filing deadline, some analysts think pressure will grow on the board to find a replacement. "Certainly his job is at risk," says analyst Susan Kalla of research firm Friedman Billings Ramsey Group. Nortel board members declined to comment for this article.
If Owens is to succeed, it will demand every bit of leadership acumen he has accumulated over the years. Owens first arrived at Nortel in 2002, simply to sit on the board of directors. He had recently served as co-CEO of satellite venture Teledesic Satellite LLC and before that as chief operating officer of tech company Science Applications International Corp. Yet it was as a military man that Owens truly distinguished himself. During his 34-year career he rose to become a decorated Admiral and concluded his tenure in 1996 as vice-chairman of the Joint Chiefs of Staff, the second-ranking military officer in the country. He developed a reputation as a bright, honest, fair officer who could think on his feet.
After the Dunn affair, Nortel's board of directors handed Owens the CEO job and cast him as the company's savior. With his baritone voice, firmly set jaw, and lofty military résumé, he seemed the epitome of credibility. Now he acknowledges that the many delays have taken a toll on him and his company. "It is unfortunate that the restatement process has taken longer than I was originally advised it would," said Owens via e-mail. "But it is far more important to me, Nortel Networks, and our stakeholders that it be accurate than it be completed on the initial schedule."
Why has owens struggled so mightily? Three people close to him say the leadership approach that served him so well in the military may not be suited to the corporate world. Owens honed his instincts in the depths of the Mediterranean Sea as captain of a submarine during the Persian Gulf War. In tight quarters, with lives on the line, he developed an approach of putting almost complete faith in his subordinates. "The military is based on trust," says Andrew F. Krepinevich, who worked with Owens in the Defense Dept. "[Recognizing that] is what helped make Bill a success in the military."
But the associates close to Owens say his trust in others, along with his unwavering optimism, may have led to the many missed deadlines at Nortel. When he first arrived at Nortel, Owens refused to give investors and analysts a firm deadline for completing the accounting restatements. But on June 29 Nortel said the investigation into the accounting issues was progressing enough that it expected audited results for 2003 and for the first and second quarters of 2004 to be reported by September. That investigation has been supervised by the Nortel board's audit committee, which is led by John E. Cleghorn, former chief executive of Royal Bank of Canada. Just two months later, on Sept. 2, Owens had to delay the restatement for the first time, until the end of October. "I can sense that he would put his faith in people who said they could have numbers by [a certain] date," says Bob Ratliffe, a member of Owens' senior staff at Teledesic. "When they don't deliver, he'll stand up and take the blame."
Cleghorn did not return calls seeking comment. Owens says that at Nortel, as in the military, he has tried "to inspire, encourage, and lead" those around him.
Still, Owens' willingness to step out in public and make optimistic pronouncements strikes some analysts as poor judgment. "He's the guy foolish enough to stand up in front of rooms and say: 'It's going to happen,"' notes analyst Mark V. Lucey of Canaccord Capital in Toronto. Owens has no time to lose in rebuilding Nortel's credibility -- and his own.
By Roger O. Crockett in Chicago