While its products still entice carriers, Nortel Networks Ltd. is down in the dumps on Wall Street.
The question looms whether the company’s technology will prevail over its financial woes.
The company’s financial stumbles plunged the company’s stock price 27 percent last week as the firm announced it fired its chief executive officer, chief financial officer and controller.
The company is under investigations from the U.S. Securities and Exchange Commission and the Ontario Securities Commission.
William Owens replaces CEO Frank Dunn, while William Kerr and MaryAnne Pahapill replace Douglas Beatty and Michael Gollogly as CFO and controller, respectively. Both Beatty and Gollogly were placed on paid leave of absence in March when the company announced it would miss the deadline to file its 2003 financial statements.
In spite of its financial problems, Nortel has been enjoying great traction in its wireless business, leveraging its expertise in Internet Protocol and strengths in third-generation technologies, as well the competing protocols of GSM and CDMA.
`This is an unfortunate turn of events,” remarked Jane Zweig, CEO of The Shosteck Group. “Nortel appears to be doing a lot of things right, and momentum was going their way.”
The company did not elaborate on the wrongdoings of Dunn, Gollogly and Beatty, fueling speculation that it may be more serious than presumed. Dunn was removed “for cause,” according to Nortel.
“The board of directors believes that the actions announced today are about accountability for our financial reporting and are in the best interests of the company and all of its stakeholders, including our investors, customers and employees,” said Lynton Wilson, chairman of the board for Nortel Networks. “These actions are an important step in the process of restoring confidence in the company’s leadership and financial reporting.”
The SEC and Nortel’s internal auditors are trying to determine if the company tinkered improperly with its reserves as well as other aspects of its finances. The SEC will try to ascertain whether the reserves were improperly computed as part of earnings, thereby inflating its income.
But Wall Street is wary for lack of information on the company’s financial worries.
“Many questions remained unanswered, such as the cause of the most recent restatement, the reasons for terminations, the validity of executive bonus payments made in 2003 and the expected timing for the review of the accounting to be concluded,” wrote UBS in a research note.
But Albert Lin of American Technology Research was more cheerful. “We believe the significant stock overhang that the restatements and investigations present, have been real, but will fade quickly (as it seems with almost all other companies in a similar situation) upon completion,” he noted. “In our view, NT will be proven to be a real company on a recovery path with an improving outlook.”
The company also confirmed its intention to review its financial reports, which sparked the top management overhaul. Nortel has set up an independent review of the circumstances that led to restating its financial results for 2000, 2001 and 2002 and the first and second quarters of 2003. The company said it understated its profits by more than $900 million, and the review is still ongoing.
The company also put off unveiling its first-quarter results for this year, owing to the announced changes. Nortel, however, revealed that its cash balance as of March 31 was approximately $3.6 billion, down from approximately $4 billion as of the end of 2003.
“At this time, the company cannot estimate the impact of any adjustments on its results of operations or financial position,” said the company.
Owens has been a director of the company since February 2002. Prior to that, he was chairman and CEO of Teledesic L.L.C, a satellite communications company. He also was president, chief operating officer and vice chairman of Science Applications International Corp. A former military officer, he was commander of the U.S. Sixth Fleet during Operation Desert Storm. He was also vice chairman of the U.S. Joint Chiefs of Staff and the second-ranking military officer in the United States.
