Nortel's New Faces Face Tough Task
McKenna, who joins after 40 years at General Electric Co. (NYSE: GE), joins his former colleague Joel Hackney, who last month joined Nortel as senior VP, Global Supply Chain and Quality, after 14 years at GE. (See Nortel Hires Quality SVP.)
And guess what? Zafirovski worked at GE for 25 years before joining Motorola Inc. (NYSE: MOT) in 2000. So might he hire from Motorola too? No -- that would be against the conditions under which Zafirovski was able to join Nortel in November last year. (See Nortel, Moto Settle on Zafirovski and Nortel Appoints New CEO .)
But Zafirovski hasn't just been hiring from GE: He's been poaching from elsewhere, too, as he revamps the vendor's management. (See Nortel Hires Legal Eagle, Nortel's Clent Came & Went, and McFadden, Spradley out at Nortel.)
McKenna will be part of Hackney's team that will play a major role in increasing efficiencies, lowering procurement costs, and improving operating margins at Nortel. Improving those margins to the new CEO's target of between 13 percent and 19 percent, from the current low single-digit range, is going to be tough work, according to analysts, who believe Nortel is losing ground to its closest competitors.
In a research note issued this week, analysts at Lehman Brothers note that Nortel's recent share price strength is "largely due to investors' hope that the new chief Mike Zafirovski may be able to turn Nortel around in a short time frame." But they add: "While we are impressed by Zafirovski's track record as an exceptional executive in the industry, we believe turning Nortel around will be a challenging task for anyone and it may take longer than investors are hoping for."
The analysts say Nortel has been "losing ground across multiple markets it competes in, including enterprise and 3G wireless… We believe Nortel's competitive positioning in wireless has significantly worsened over the last 12 months, losing ground at Sprint Corp. (NYSE: S) and Vodafone Group plc (NYSE: VOD) and being shut out from Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) and Cingular Wireless , both who were among Nortel's top customers." (See Cingular Confirms 3G Trio and Telstra Unveils Switch to IP.)
And things haven't been working out for Nortel in the rapidly expanding Indian and Chinese markets, either. (See Nortel Suffers China 3G Setback and Mega BSNL Contract Looms.)
So the Lehman team is waiting for the new CEO's next moves, and wonders whether Zafirovski might even exit some markets. "In our view, it is crucial to see whom Zafirovski can bring in to help him run Nortel… [We] believe that longer term Nortel needs to make up its mind as to which businesses it wants to stay in and which it should get out of. Checks suggest that Nortel has hired an outside consulting firm to evaluate the different options Nortel has."
Nortel declined to comment on whether it is using external consultants for this purpose. A spokesman added: "The new CEO, Mike Zafirovski, is committed to a business transformation process that will generate profitable growth."
Nortel's share price closed at $3.32 Monday, valuing the vendor at $14.4 billion.
— Ray Le Maistre, International News Editor, Light Reading