Who Wins the Bumble Bowl?

Nortel's fumbled again, but can Lucent pick up the slippery pigskin?

May 4, 2004

6 Min Read
Who Wins the Bumble Bowl?

Judging from the LR message boards, people just love the Nortel Networks Corp. (NYSE/Toronto: NT) vs. Lucent Technologies Inc. (NYSE: LU) debate. It's the game that everyone wants to bet on – but one that neither competitor seems to want to win.

Indeed, this is more like a Division III high school than the NFL. Judging by Nortel's latest mangled books, it's fumbled a perfect opportunity to establish a dominant lead (see Nortel Stock Dives on Dunn Downfall, Nortel Fires CEO, Nortel Shares Fly South, and Sour Grapes of Roth).

Nortel appeared to have a decent recovery under way, until the small revelation released last week that many of its profits were fictional. The added bonus was it took them years to come clean. Apparently those long winters in the Great White North can freeze the brain. The high irony here is that Frank Dunn, the former CFO turned CEO, was injected into the position to clean up the books. Turns out he was actually in the back room feeding them through the shredder and then exercising his creative side.

But how much does the recent accounting scandal affect the future? Now that he's retired in shame, Frank Dunn will take a place beside John Roth in Nortel's "Denial Hall of Fame," that collection of Old Ottawa Boys who had trouble grappling with basic reality (see Nortel's Roth Rakes It In, Nortel: Can This Company Be Saved? , Nortel Swings Axe, Switches CEOs, and Has Nortel Hit Bottom?).improved in 2003. Unless it turns out that somehow it was manufacturing all that new cash – or perhaps disguising debt through eccentric partnerships in the Caribbean – the balance sheet remains the same.

That leads us to our handicapping of what we are pleased to call the Bumble Bowl.

Post-Dunngate, Let's take a look at how things have changed the Lucent vs. Nortel relative positioning in four key areas:

  • 1) Products
    Will they maintain product incumbency in key product lines?

    2) Liquidity and General Viability
    Are they generating cash and reducing debt?

    3) Corporate Culture and Governance
    Are they committed to change?

    4) Public Perception and Investor Relations

1) Products

On the technical front, it's hard to see the Frank Dunn fiasco as having much of an effect on Nortel's technical program. Nortel's recent strength in the softswitching market and its incumbent positions in metro DWDM and Sonet/SDH are still intact. Dunn was a beancounter (or a bean exaggerator) at heart, and he was not a real technical leader. What will be important to watch is whether this large-scale corporate scandal will distract from recent developments, such as its softswitch developments and its important new "Neptune" product.

Unlike Lucent, whose staffing cutbacks have been much more extreme, Nortel's product groups appear to have sustained less carnage in recent management shakeups. But changes at the top always result in hesitancy and slow things down.

Current Handicap: Net Even

2) General Viability

In late 2002, the question everybody was asking was whether either Nortel or Lucent could avoid bankruptcy. People were openly debating which stock would go to zero first. Their bonds were selling for pennies on the dollar. Both management teams initiated vast liquidity programs, jettisoning surplus assets, cutting staff, outsourcing manufacturing, and raising cash through the sale of convertible securities. Eventually, the stock market improved, the companies improved their debt and cash positions, and the crisis passed.On the financial front, the beancounters all have their opinions and spreadsheets, but the only figures that really matter for these companies, which are both still highly leveraged, are the raw, unadulterated measures of cash and debt. In the case of Nortel it appears as if the book-cooking did not affect the balance sheet (of course now, who could really be sure?).

With this in mind, Nortel's still got an edge. Even after the restated earnings, Nortel was still in a cash-flow positive position in 2003. Remember, Lucent bled cash in 2003.

At any rate, as of the end of 2003, here were the raw cash and debt levels for the two giants:

  • Lucent

    Total Cash: $4.15 billion
    Total Cash Per Share: $0.97
    Total Debt: $6.27 billion


    Total Cash: $3.99 billion
    Total Cash Per Share: $0.96
    Total Debt: $3.88 billion

Current Handicap: Nortel +1

3) Corporate Culture

Here, Nortel's sustained some serious damage. How the board named Dunn, the former CFO, to become the CEO and then looked away as he fouled up the books for years is unbelievable. It raises new questions about the board's competence and the Old-Boy Culture at Nortel, which apparently hasn't changed much.

Clearly this was the case of an absentee, protectionist board that appears to have been asleep at the wheel. Sadly, this dredges up the worst fears about Nortel's culture: Corporate arrogance, the inability to deal with criticism, and a lack of independent, outside influence on a monolithic, politically fixed culture.

Hey! Didn't we used to say that about Lucent? Well, in the Bumble Bowl, you never know who's going to outbumble the other!

Current Handicap: Nortel -1 / Lucent +1

4) Public Perception

Ooops! We did it again! Wall Street hates that. The Grandma who takes a 50 percent hit on her Nortel stock hates it too. Analysts who are using Nortel's figures to try to assess how well they are doing hate it. Editors that go out on a limb and say things are better hate that. (Mea Culpa.) Everybody hates it. Here the real damage was done to Nortel's credibility.Current Handicap: Nortel -2 / Lucent +2

Overall, Nortel has really shot itself in the foot. Nortel's stock has taken a shellacking. But much of the damage has been confined to the PR/investor-relations department and has avoided hitting the balance sheet. Looking forward, it's hard to see Frank Dunn's removal as a real negative.

See-ya, Frankie!

Is Nortel's stock going back to 50 cents? Doubtful. And if you are an investor, isn't it a lot more appealing at $3 without Frank Dunn than it was at $8 with Frank Dunn?

As for Lucent? Well, they have the ball now. Let's see what they can do with it. Will they move downfield or will we just see another four-downs-and out? This ain't no Super Bowl, after all. It's the Bumble Bowl.

— R. Scott Raynovich, US Editor, Light Reading

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