Going, but not forgotten, Nortel's many legacies

For younger investors accustomed to seeing the Toronto Stock Exchange rise and fall in rhythm with the price of a barrel of oil, it may be astonishing that it once rose and fell on news releases from one company that made things. Lots of things.

At its height, Nortel accounted for more than a third of the total valuation of all the companies listed on the TSX. It once employed more than 95,000 employees and had a stock market value of $366 billion, making it Canada's most valuable company.

On Tuesday, its stock value was worth less than $200 million.

'Nortel is kind of like Wayne Gretzky. All those goals he scored in Edmonton didn't go away just because he moved to Los Angeles. Great things were still accomplished.'

—Duncan Stewart, D-S-A-M Consulting

"In terms of the legacy, Nortel is kind of like Wayne Gretzky. All those goals he scored in Edmonton didn’t go away just because he moved to Los Angeles," said Duncan Stewart of D-S-A-M Consulting. "Great things were still accomplished. Nortel had some great inventions, it will always be a great pioneer."

Nortel is headquartered in Brampton, Ont., but its research and development centre was in Ottawa where it was one of the original anchors of what came to be called Silicon Valley North.

It had other R&D sites in Montreal, Belleville and Calgary, as well as in the U.S. and overseas.

Stewart said wherever Nortel went, smaller technology startups would form around it, taking advantage of its expertise, often hiring its former employees.

"Ten years ago, if this had happened, the Canadian tech landscape would be gutted. Nortel wasn't just the anchor, it was 90 per cent of the industry. Everyone worked or partnered with Nortel," said Stewart.

"That hasn't been the case in a decade. There are new companies in Ottawa now like Cognos and Newbridge/Alcatel. It's still an important company — maybe $1.5 billion in R&D spending. But Silicon Valley North has become more fragmented and therefore the 'loss' of Nortel will be less catastrophic than it was 10 or 20 years ago," he said.

Mark Evans of ME Consulting keeps track of the company on his blog, All About Nortel. He thinks it's a little early to be talking about Nortel's legacy since it hasn't gone anywhere yet.

"I think jumping to the conclusion that Nortel is going to disappear because it's filed for bankruptcy protection is probably premature. The new Nortel will be smaller, more viable. It will continue to have a role — just a lot less significant role."

Accounting Legacy

One legacy Nortel would prefer was less significant is its accounting scandal.

In October 2007, it paid $35 million US to settle the Securities and Exchange Commission's fraud charges over the company's accounting. The SEC accused Nortel of manipulating its financial reports to meet its earnings guidance and of artificially reducing its profit in late 2002 to avoid returning to the black earlier than it had forecast.

It also filed civil charges against several former Nortel Networks executives, including ex-CEO Frank Dunn for "repeatedly engaging in accounting fraud to bridge gaps between Nortel's true performance, its internal targets and Wall Street expectations."

"Nortel never recovered from its numerous accounting scandals and I think the credit crunch was its ultimate undoing," said Mark Sue, the Telecom Equity Research Director for R-B-C Capital Markets.

"Nortel was stuck in a restructuring mode perpetually following the scandal. It's a sad and disappointing end for the company," he said.

"I don't think Nortel's accounting trouble had a big impact on the Canadian economic landscape," said Mark Evans. "Nortel fell victim to its own troubles, I don't think it reflects badly on Canadian companies doing business globally. It just operates in a very competitive industry that is undergoing significant change. Nortel is not adapting as it should be."

"The thing about Nortel is that it's not a telecom equipment maker any more. It's outrsourced mostly everything and become a sales/service development company. For the most part, its assets aren't plants, it's people. What Canada needs going forward in the new economy is people power. It's about ideas and innovations driving the economy rather than making widgets at a low price," said Evans.

TSX domination

The fact that Nortel no longer dominates the TSX, and in fact may be about to be delisted, doesn't concern Fred Ketchen, a director and equity trader with Scotia McLeod. He was a trader when the company was known as Northern Telecom.

'Canada has lost an organization but Canada has not lost the Canadian employees that make up that organization, nor has it lost the history that the organization initiated over 100 years ago. Some employees will start their own companies, which may also end up in the history books.'

—Nortel employee on All About Nortel blog

"Technology is a sector that most people are amazed by, but don't understand," he said. "People think it's new and everlasting but it's not, there's something new to come along after it. Nortel was the market darling for a long, long time. Everyone though its stock price wasn't going to $1,000, they thought it was going to $8,000 for goodness sake. But times do change. Sometimes it's going to be commodities, who knows where the next move is going to be but I can tell you there will be a next move."

Evans agrees.

"A lot of people invested in Nortel because it was a Canadian company and they felt an emotional bond to it. Even when the company started to struggle, everyone wanted to believe that it and the stock was going to rebound. They weren't buying on fundamentals, they were buying on emotion and that's a very dangerous habit to have when investing," he said.

"And Nortel did nothing to deter the enthusiasm of investors. At the height of the dot.com boom, [then CEO] John Roth was out there saying Nortel was going to double its sales to $40 billion, so they were as guilty as anybody of feeding the machine. Canadians wanted to be excited about a technology company … got solidly behind Nortel and jumped without fully realizing what they were doing."

So what will be left of the once-mighty telecommunication giant? A few blue-glass and concrete office buildings that suggest modernity and progress but are, for the most part, empty?

"Nortel is already down 75,000 people from where it once was," said Duncan Stewart.

"Many employees have gone on to new companies and made new innovations and continue to do well and excel. Nortel's legacy will not disappear merely because it went bankrupt, but there's no question the legacy is somewhat tarnished."