In some ways, Nortel President and CEO Mike Zafirovski’s tenure sounds like a movie script of a high-powered executive asked by the board of a failing, quirky old-fashioned company with brilliant minds and products but clashing egos and old thinking set in a small town.

 

Only with Nortel, the ending may not appear to be: in this writeup the firm is being dismembered, sold to foreign buyers with whom both the firm’s legacy and the staff face uncertain futures despite assurances that their work will continue.

 

The Nortel top exec and the company’s board of directors have stepped down while the board has been shrunk from nine to three members: John A. MacNaughton, Jalynn H. Bennett and David Richardson (News - Alert), with Richardson serving as chair. These individuals will also serve as members of the firm’s audit committees.

 

Nortel will be seeking Canadian court approval for company monitor Ernst & Young, to take on an enhanced role with respect to the oversight of the business, sales processes and other restructuring activities under the Companies’ Creditors Arrangement Act proceedings.

 

The firm is also identifying a principal officer for the Nortel companies in U.S. Chapter 11 proceedings who will work in conjunction with the U.S. Creditors’ Committee, ad hoc bondholders group, and the monitor, which appointment will be subject to U.S. court approval.

 

Pending intervention by the minority Conservative Canadian government Nortel is selling its wireless division to Ericsson for $1.13 billion while Avaya (News - Alert) has agreed to pay $475 million for its enterprise unit in a stalking horse auction that will go to auction on Sept.11. The sales could be in jeopardy if the government intervenes or if it falls in a non-confidence vote that could happen in late September, and the Conservatives fail to win re-election. The opposition parties are threatening to make the Nortel breakup and sale to non-Canadian firms a campaign issue.

 

Nortel had invited Zafirovski, who had been Executive Vice President and COO at Motorola, to transform the struggling company in November 2005. He replaced Bill Owens, a former U.S. Navy admiral appointed in April 2004 that the Globe and Mail said in a story that first appeared in October, 2005 who cleaned up the firm that had been crippled by accounting, financial and industry woes. Telecom equipment spending collapsed earlier this decade but when signs of recovery emerged in 2004, so did bookkeeping problems that led to the firing of 10 executives, including then CEO Frank Dunn.

 

“Mr. Owens came when people were ready to turn the lights off,” Zafirovski said in the story. “I do believe this is the opportune time to take the company to the next level … I’m convinced Nortel will be a big winner again.”

 

But Mr. Zafirovski does have his work cut out, said the article. Once Canada’s tech darling with a stock price that peaked at $124.50 in 2000, it has challenging fight to rebuild its reputation with investors and customers. Although first-half revenue rose in 2005, Nortel posted a small loss in the period.

 

The story identified challenges including revenue for traditional circuit-switched products is on the decline and outpacing growth in next-generation equipment. With the emergence of new rivals from China, there is concern that prices in the telecom equipment market may come under pressure. Also Nortel is playing catch up with Cisco Systems in the enterprise market. Other competitors in Nortel’s various business areas include Lucent Technologies Canada, Alcatel (now Alcatel-Lucent (News - Alert)), and Siemens AG (now Siemens Enterprise Communications).

 

Outgoing Nortel board chair Harry Pearce said that Zafirovski made great progress on many fronts including addressing significant accounting and related legal issues; improving the quality of Nortel products and the company’s cost structure. His ambitious vision helped shift the economic center of the company from legacy to growth investments.

 

It was unfortunate, said Pearce, the transformation was derailed by a deteriorating economic climate and the company’s legacy cost structure. The operating improvements and strategic investments made during his tenure significantly contributed to the fact that Nortel’s businesses are so attractive to potential buyers today.

 

“We’ve reached a logical departure point,” said Pearce. “Mike made a commitment to see the process through the stabilization of the company, sale of its largest assets and the right plans and people to continue operating our business and serving customers. He has done so. I appreciate the commitment and passion he brought to this company since day one, including his guidance through the extremely difficult decisions we faced since filing for creditor protection. I also wish to recognize the enormous commitment and dedication of the departing members of the Board who really believed in and worked hard for Nortel.”

 

“Although the past several months have been challenging, Mike has been a tireless champion for Nortel, its customers and partners,” echoed Mike McNamara, CEO of Flextronics which entity is chair of Nortel’s Official Committee of Unsecured Creditors. “His belief in Nortel people and technology was always paramount. He always strove to do what was best for the company and its stakeholders, and Nortel’s high customer service levels are strong proof of that. As a substantial creditor and Nortel’s largest supplier, I appreciate his efforts.”

 

Research in Motion (News - Alert), which has been fighting the sale of Nortel’s wireless unit, tipped its hat at the departing CEO.

 

Canwest News Service reported that co-CEO Mike Lazaridis did not blame Zafirovski for Nortel’s weakened state.

 

“The mistakes that led to Nortel’s insolvency were made many years ago,” he told members of the Canadian House of Commons’ industry committee Friday.

 

In what may be his swan song Mr. Zafirovski said in a prepared statement that the board members and himself came to Nortel because we really believed in the value of Nortel’s people and technology. Although solid progress was made in many areas, at the end, the capital structure and legacy costs coupled with the economic downturn proved too difficult to surmount.

 

“I have tremendous respect for the Board of this company and the process we went through to initially transform the company, and since filing, to work to maximize the value of our businesses while preserving employment and customer commitments to the greatest extent possible, “said Zafirovski. “The value created through Nortel innovation is now clearly visible in the active interest for its businesses and intellectual property. Maximizing the value through the sale of our businesses is the best outcome for creditors, customers, and employees.”

 

---

---