Nortel deals blow to Canadian pride

Bloomberg

Canadian investor Gavin Graham recalls the time when Nortel Networks was so big, with a market value of almost $250 billion, that fund managers had to own shares just to keep up with the benchmark index.

"You were pilloried if you did not own the stock," said Graham, who helps oversee more than $30 billion as director of investments at Bank of Montreal Asset Management in Toronto. "Nowadays, I try not to embarrass people by asking who still owns Nortel."

Nortel, North America’s biggest maker of telephone equipment, in business for 113 years, filed for bankruptcy protection Wednesday, capping one of the greatest corporate collapses in Canadian history. The company had a market value of C$60 million, or $48 million, as its shares fell 69 percent to 12 cents on the Toronto Stock Exchange.

At its peak in 2000, Nortel had annual revenue of $28 billion and employed about 93,000 people in more than 150 countries. The stock traded as high as C$1,245, adjusting for stock splits, for a market value of C$366 billion, making it the biggest company in Canada. The shares quadrupled in 1999 on expectations the company would benefit from the surge in demand for Internet-based technology.

Nortel accounted for 37 percent of the Toronto Stock Exchange 300 Composite Index, as it was called then.

The Canadian psyche
"In the heyday of 1998 to 2000, it became a huge problem," and Paul Hand, managing director of equity trading at RBC Capital Markets in Toronto. "If you’re capped out at 5 percent or so and it’s 30 percent of the index, you’ve got a bit of a problem."

The bankruptcy filing is "a blow to the Canadian psyche," said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier in Toronto, which manages C$3 billion. "We once viewed Nortel as a world leader in the technology area, and now that dream is shattered."

Nortel’s decision, following the takeovers of Canadian firms such as aluminum maker Alcan and miner Falconbridge, means another Canada-based global leader is about to disappear, according to Louis HŽbert, a professor of management strategy at the HEC Montreal business school.

"There goes another marquee name," HŽbert said. "Now we will only have two world leaders," he said, citing Research In Motion, maker of the BlackBerry e-mail phone, and the plane and trainmaker Bombardier.

A long history
Nortel owes its existence to the Bell Telephone of Canada, which set up a manufacturing arm after winning patent rights for the telephone from Alexander Graham Bell in 1874. Founded in 1895, Nortel - then called Northern Electric and Manufacturing - supplied telecommunications equipment to Canada’s telephone system.

The equipment maker later changed its name to Northern Telecom to reflect a focus on telecommunications, and rebranded itself as Nortel Networks in 1999 after searching for a more Internet-like moniker.

"It’s sad," said Doug McGregor, 52, chairman and co-chief executive officer of RBC Capital Markets, the investment-banking unit of Canada’s biggest bank. "It was a great Canadian company, it employed a lot of people and it was an important part of the economic structure of Canada."

Nortel’s growth during the Internet mania of the late 1990s may have been an illusion. The company restated earnings going back to 1999 after probes by regulators in 2004 indicated executives incorrectly booked revenue, inflating sales figures by $3.4 billion.

Nortel paid a $35 million fine in 2007 to settle U.S. Securities and Exchange Commission claims that it defrauded investors by manipulating earnings from 2000 to 2003.

Investors blame Nortel for overpaying for transactions such as the $6.9 billion purchase of Bay Networks in 1999 and the $5.7 billion acquisition of Alteon Websystems a year later. The company employs almost 6,000 people in Canada, among its global staff of 30,000.

"The quality of management is what did them in," said Jean Duguay, a fund manager at Gestion de Placements Eterna in Quebec City, which oversees about C$650 million and sold its Nortel shares more than five years ago. "They went on an acquisition spree during the Internet bubble but they paid over the top for assets and never managed to get rid of the debt."