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Nortel Stock Dives on Dunn Downfall

Light Reading
News Analysis
Light Reading
4/28/2004

Investors aren't in the mood to wait for explanations of Nortel Networks Ltd. (NYSE/Toronto: NT) CEO Frank Dunn's firing. Dunn, who was sacked along with former CFO Douglas Beatty, former controller Michael Gollogly, and several others, was replaced this morning by William Owen, who has been a company director since 2002 (see Nortel Dismisses Dunn).

The networking equipment maker's shares fell $1.62 (28.72%) to $4.02 in midday trading on Wednesday after the company's housecleaning announcement. Today's freefall has taken Nortel's stock price down more than 47 percent from its 52-week high of $8.50.

Why the selloff? Here's a reason: Given Nortel's financial mess, it's possible the company isn't nearly as healthy as it has been telling the public. And, given Nortel's past six months of financial headaches, investors are asking themselves if it's really worth hanging on and waiting for another shoe to drop.

Back in 2002, the company filed a significant restatement of its enterprise equipment revenues and then declined to talk about it. Oops!



A bit later, the company declared its financial statements for some 14 quarters would have to be restated. Oops!

Then Nortel refiled its results for the past, delayed its earnings, replaced its CFO, and announced it was being investigated by the Securities and Exchange Commission (SEC) and the Ontario Securities Commission. Oops! again.

Nortel isn't yet elaborating on what specific wrongdoing Dunn and the others were involved in. On a conference call today, Nortel executives broadly stated that Dunn's termination was "about accountability for financial reporting."

At the moment, Nortel is saying its cash balance and reported revenues for prior quarters won't be affected by the scandal. But the company is getting ready to erase some $250 million -- maybe more -- in profits reported for 2003. The company reported $499 million in net earnings for that year and now says -- Oops! -- it is off by half.

To wit, the net profit Nortel reported for the first half of 2003 should have been a net loss, according to the company's latest revelation. Nortel says the restated net earnings "will largely be reported in prior periods, resulting in a reduction in previously reported net losses for such periods including 2002 and 2001."

As ever, the remaining executives say that Nortel will tough it out and restore its credibility. "To our shareholders, we're committed to getting this thing right," says Bill Owen, the new CEO. "Financial accountability will become our watchwords."

As watchwords go, "financial accountability" is probably better than "Oops!"

— Phil Harvey, News Editor, Light Reading

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CoolLightGeek
CoolLightGeek
12/5/2012 | 1:54:57 AM
re: Nortel Stock Dives on Dunn Downfall
So let me see if I have this straight-

When LU reports a quarter with profit, LR gets to imply LU is intentionally trying to mislead investors as to the health of their business.

But when Nortel is involved in financial mis-statements that lead to removal of the head and shoulders of the company, its just an Oops?

Does LR think "Canadians" are too polite to ever have inappropriate intent?

My condolences to all the hardworking NT employees: I fully expect at least a good portion of you will get though this with your integrity and business intact.

Execs make it to the boardroom by being keenly aware of the reward/punishment systems in the world around them. I feel better that the oversight groups such as the SEC are paying more attention to board room dealings.

CLG
opticalwatcher
opticalwatcher
12/5/2012 | 1:54:57 AM
re: Nortel Stock Dives on Dunn Downfall
The stock market is, as usual, shortsighted. Where are they going to put their money? Into another Enron? Nortel is cleaning house--this is a good thing. The company may actually be worth what they say it is, as opposed to many other companies in this industry.

After the crazy roller-coaster ride of the economy, a little honesty and stability are what investors should be looking for. Or is everyone still looking for an over-hyped get-rich-quick stock to lose their fortunes with?

Machavelli
Machavelli
12/5/2012 | 1:54:52 AM
re: Nortel Stock Dives on Dunn Downfall
It is a shame we live in an age, where CEOs never admit responsibility for anything bad (but usually are fully responsible for it) and take the credit for everything good (even though they usually had little to do with it).

I would be nice to see more Lee Iaoccia's out there and less Frank Dunn's and John Roth's.

Remember, when Chrysler rolled back the odometers on a few thousands "supposedly new" cars. Lee said "The buck stops here" and took fully responsibility for his company's actions and compensated all affected customers.

"M"
dodo
dodo
12/5/2012 | 1:54:48 AM
re: Nortel Stock Dives on Dunn Downfall
http://www.globeandmail.com/se...

Will the 16 execs pay back the USD30M allocated to them for exaggerated performances:

The special bonus program, which exists above and beyond a larger "return to profitability" bonus plan, was established in January, 2003. It set four targets for a three-year period, based on results measured by "return on sales before tax," which was not explained further. Other factors are also considered, such as Nortel's performance compared with competitors.

orange
orange
12/5/2012 | 1:54:38 AM
re: Nortel Stock Dives on Dunn Downfall
Lucent should focus on its own problems. The current LU stock price reflects Wall Street's opinion of Lucent's last quarter and it ain't good. As a ONG employee how does it feel to know you contribute to the company's bottom line only as much as the retirees do?
ohub
ohub
12/5/2012 | 1:54:20 AM
re: Nortel Stock Dives on Dunn Downfall
I pretty agree with your opinion.

ohub
http://www.ohub.net
CoolLightGeek
CoolLightGeek
12/5/2012 | 1:53:42 AM
re: Nortel Stock Dives on Dunn Downfall
LU is focusing on its own problems and its opportunities.
LU and NT are percieved by Wall Street as very corealated: NT can't take a big dive without bringing down LU.
As an ONG employee, I have always been very proud of my contribution and efforts to bring ONG to higher profitability. I expect ONG profitability to trend higher and clearly a modest positive is better that previous year negatives.

Now for a self-described cynic who's only posts on LR attenmpts to bash LU (probably because someone in LU killed your "precious box" that you labored over) your seeming transference to hatred of everything and everyone LU certainly makes for interesting reading.

I especially enjoyed:
"The really sad part is putting up Nortel's stock price against Lucent's stock price over the last year. Lucent's performance is about 2/3 of Nortel's. Pat's and Lucent's performance has been pathetic over the the last year. When I was in high school 67% was a failing grade. It's only going to get worse all Lucent has is its "enstalled base." However every year other vendors with newer better products take market share. This assessment is based on facts, and is not just another "Lucent Sucks" rant, although it does."


Would you care to rerun your comparison today?
http://lightreading.stockpoint...

I'll wait while you swallow the crow caught in your throat...


I am NOT anti-NT: if you objectively reread my post, it should be clear I was shooting barbs at LR, not NT.

CLG
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