Nortel's CEO: Next to Go?

Maybe Nortel Networks Ltd. (NYSE/Toronto: NT) CEO Bill Owens was only meant to be a “wartime president,” not the leader that would realize the Ontario-based company’s long-term vision.

Industry sources say Owens, who replaced fired CEO Frank Dunn last April amid accounting scandal, was not and is not the company’s choice for Dunn’s permanent replacement.

It certainly wouldn't be out of character for Nortel to recruit another CEO, while Owens goes back to his board duties. CFO William Kerr, like Owens, was brought in to manage the cleanup of the accounting scandal that came to light last April. Nortel announced his removal January 27, and a Nortel spokesperson said Kerr's position had always been understood as "interim." (Nortel has had six CFOs in the last five years.)

Nortel's board proved earlier this week it is willing to take drastic action to right its ship. It is suing former CEO Frank Dunn, former CFO Douglas Beatty, and former controller Michael Gollogly to retrieve more than $13 million in compensation paid to them as a result of allegedly trumped-up earnings reports for 2003 and 2004.

Since last April, Nortel has dedicated 650 employees and contractors to the arduous job of restating the past, and Owens was uniquely qualified to oversee the work. In his pre-Nortel life, Owens was vice chairman of the U.S. Joint Chiefs of Staff, and had responsibility for the reorganization and restructuring of the Armed Forces in the post-Cold War era.

But taking Nortel to the next level may not be Owens's forte.

“I hear scuttlebutt from investors all the time, especially Canadian investors, that are very dissatisfied with his performance,” said analyst Paul Sagawa of Sanford C. Bernstein & Co. Inc. “There isn’t a product line that Nortel is involved in that has not lost money on his watch.” Sagawa, however, sees no direct indication that Nortel’s board is considering acting on these rumblings.

But the emergence of a likely heir to the throne may change things. The name Mike Zafirovski, currently COO at Motorola Inc. (NYSE: MOT), is coming up again and again in discussions about Nortel and Bill Owens. Industry observers say that after being passed over for the top job at Motorola over a year ago, Zafirovski may be looking to fill the big chair at Nortel.

Zafirovski is widely credited with “saving” Motorola’s handset business and may look appealing to the Nortel board, says Argus Research’s Jim Kelleher. He says the industry perception is that Nortel is failing to convert its GSM and CDMA momentum into a strong presence in WCDMA -- and Zafirovski's expertise meshes well with that problem.

Zafirovski arrived at Motorola in 2000, when he was brought in as president and CEO of the Personal Communications Sector (wireless handsets, related software, and consumer two-way radio).

Nortel officials did not return calls for comment.

Some analysts now see Nortel as an enigma. Its product portfolio is widely well-regarded and seen as one of the most complete in the industry, yet the scandal and the protracted period of correcting it seems to have sapped the company's ability to ramp up profits. “What Nortel needs is a management team that can optimize the products they have now,” Bernstein’s Sagawa says.

Nortel’s accounting nightmare is playing itself out, with only the last two quarters of 2004 left to restate. That restatement may have a lot to do with Owens’s future. “Owens, appointed in April, was commander in chief for all of the 2004 second half,” says Kelleher.

“If second-half results are characterized by severe top-line or margin erosion, the investment community will likely clamor for his removal.”

— Mark Sullivan, Reporter, Light Reading