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:


    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

CoolLightGeek 12/5/2012 | 1:50:19 AM
re: Who Wins the Bumble Bowl? Scott- It is the Superbowl, but just a very ugly one. As ugly as it is, NT and LU are still the big dawgs.

I am impressed that you actually seem to be taking more thoughtful looks at Lucent.

Another year from now, I expect Lucent may become one of your favorites, especially in Wireless and Optical Networking.

Machavelli 12/5/2012 | 1:50:15 AM
re: Who Wins the Bumble Bowl? LU will be in a better cash position than NT a year from now.

Not because Lucent is doing a better selling it products, but because it has settled its shareholder lawsuits.

Lucent settled a frivalous class action lawsuit for 517 million dollars earlier this year.

Nortel on the other hand, has countless lawsuits coming out the woodworks from every ambulance chaser law firm.

Unlike the baseless lawsuit filed against Lucent, the Nortel ones have teeth.

- The upper management cooked the books by shifting the 2002 profits into 2003 to trigger millions in undeserved "profitability" bonuses.
- At the same time thousands of Nortel employees were let go to prop up the stock price.
- These cooked books prompted many investors to drive the stock price from $3.00 and $8.00 thinking the company was on the raod to recovery.
- The company admitted incompetence in its management by firing 3 executives (including Frank Dunn) "for just cause"

Lucent has paid its 500 million settlement, but Nortel lawsuit can easily hit 5 billion when it is settled given all the rock solid evidence.

If I still invested in Telecom stocks I would avoid Nortel like the plague, would be lukewarm on Lucent and choose Cisco as the all time best managed and best valued Telecom stock.


link 12/5/2012 | 1:49:56 AM
re: Who Wins the Bumble Bowl? As I understand it, Nortel was the instigator of it's current situation in that it's management launched the independant auditors on the books to make sure that there was adherence to the accounting rules. I take it to mean that these guys (whomever initiated the audit) are looking to have financial reporting integrity. While it is bad to have the mistakes (extending the benefit of the doubt) isn't it a good sign that it is being dealt with in an appropriate (the guy at the top actually owns the responsibility for actions) and public way?

I wonder how independant the accounting firms are at working the books for LU or CSCO? Is Nortel shooting themselves in the foot for nothing or are they leading the way in financial transparency? Has LU or CSCO ever initiated independant audits? Will they ever do so if they don't have to? I imagine any of the big players would have contracts spanning multiple quarters where there might be plenty of fudging room shifting money in and out of quarters to help the books if the accountants weren't too picky? If the accountants are employees of the company, do they have any incentive to be picky about interpreting the rules appropriately?

Machavelli 12/5/2012 | 1:49:54 AM
re: Who Wins the Bumble Bowl? If Nortel was just checking to see if they were adhering to accounting rules, why did the following events happen:

- The Security Exchange Commision and Ontario Security Commision both launched investigations.

- Moody's reduced Nortel debt status to junk (B3)

- Why did Nortel fire 3 executives for "just cuase" if no one did anything wrong ?

- And finally, why were profits moved from 2002 to 2003. No big deal, except for the fact that a 100 million "return to profitability" bonus fund for upper executives was setup for 2003. A coincedence, I think not !!!



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