Nortel accounting scandal

It has been a long road that brought Nortel Networks Corporation (“Nortel”) to its present state. Northern Telecom, known as Northern Electric until 1976, was at one time a wholly owned subsidiary of Bell Canada. By the mid 1980’s Northern Telecom was the second largest supplier of telecommunications equipment, largely electronic telephone switches, in North America. Northern Telecom expanded worldwide firstly into Asia then Europe, followed by Latin America. In 1995 Northern Telecom shortens its name to Nortel. Bell Canada, later known as BCE, divested its interest in Northern Telecom throughout the 1970’s owning just over 50 percent by 1980. Finally in 2000, BCE distributed its remaining ownership interest in Nortel to the shareholders of BCE.

Not only was Nortel a telecommunications company, it was a major research powerhouse, receiving substantial support from provincial and national governments. The bulk of Nortel’s R&D was done in Canada to take advantage of generous R & D tax incentives.

Nortel, despite its large size, international shareholders and global reach, was still a “Canadian” company, with the majority of its management and board of directors’ Canadian citizens.

It was John Roth (“Roth”) CEO who took Nortel from traditional telephone technology to the Internet.1 Nortel equipment carried 75 percent of the North American Internet traffic in the late 1990’s. The company’s growth was due to both the explosion in the Internet market and through acquisitions. In 2000 alone, Nortel acquired 11 companies at a cost of US$19.7 billion. By 1998, Nortel was Canada’s largest telecommunication company with 73,000 employees and revenues of US$22 billion.2

The bubble burst when Nortel’s customers stopped buying telecom equipment in the great high-tech bust in 2001. As the industry imploded, Nortel seemed the most secure, until it announced huge declines in prospective sales.

During 2000, Nortel, with over 3.8 billion shares outstanding, accounted for greater than one third of the value of the entire S&P/TSX 300 composite index. Nortel shares peaked at the end of July 2000 at Cdn$124.50, giving Nortel a total market capitalization of $473.1 billion. As a secure, growing Canadian company, the company’s shares were held in a large number of institutional and private investor portfolios. In addition, due to Canada’s restrictive rules with respect to pension plans’ investing in foreign securities, Nortel was the most widely held security in Canada. The shares took a two-year slide bottoming out in September 2002 at under Cdn$1. The once mighty Nortel risked being de-listed from the NYSE, which, under exchange rules, can happen if a stock closes below US$1 for 30 consecutive trading days.3 By 2002, Nortel’s long-term debt was downgraded to “junk” status.