The Rise and Fall of Nortel Networks - 5 Minute History Lesson

in the world of finance we are often quick to forget the tragedies of the past yet valuable lessons are to be had by exploring their causes and effects after all and world of ever-changing rules products and services history is the one constant that can guide us through the ambiguity so let's take a 5-minute history lesson on today's plain bagel it's 1971 and after years of research northern electric a Canadian spin-off of the Bell Telephone Company is about to make an innovative breakthrough by releasing the sp1 a telephone switching system used to connect phone lines one of the first ever to use a computer and with the added features it offers it sells faster than your grandma's hotcakes at the county fair the success of the product helps northern go public with company going on to develop the most successful and the first digital private branch exchange system in the world the sl1 by the late 1970s northern electric or sorry telecom now is dominating the global market and they're doing pretty well in the data space to providing a proprietary local area network with voice text email spreadsheet and word processing capabilities and an electronic calendar to boot helping offices digitize their business and propelling the company sales and stock price but just as Northern sets out to become the number one provider of public and private networks a new challenger approaches a network solution that's combining local area networks to revolutionize communication as we know it and they're calling it the Internet at first Northern doesn't give much merit to the technology even trying to compete with it via its own network called the infrastructure wait really huh but anyway by 1997 with the acceleration of the dot-com boom it becomes pretty obvious that management made a strategic boo-boo in avoiding the phenomenon but hey if you can't beat them join them right so in 1998 northern telecom shifts its focus from telephones to data and multimedia networking and decides to rebrand itself changing its name to the one we've all come to know and love Nortel Networks get it Nortel northern telecom so Nortel Networks looking to catch up on the Internet begins buying up every internet startup in sight making nineteen point seven billion dollars worth of acquisitions in 2000 alone and with demand for data accelerating the company begins flooding the market with fiber optics helping the stock move ever higher but something's wrong no tell isn't actually making money anymore turns out all those acquisitions are causing pretty large expenses to appear on the income statement and between 1998 and 2000 the company fails to record a single annual profit this is bad news bears especially for management who have accumulated buttloads of Nortel stock options at this point but they have just the innovation to save nor tells hide they call it earnings from operations it's beautiful thing because it's a measure of profitability that ignores all acquisition expenses and management convinces shareholders that this new positive number is totally more accurate dummy counting 1 and investors dig it vine up Nortel shares despite its mounting losses in the year 2000 Nortel stock hits a high of 124 dollars and 50 cents making it the ninth most valuable company in the world at this point every investment fund pension and investment account tracking the Canadian market is holding Nortel stock and for good reason because the company comes to represent more than a third of the entire toronto stock exchange 300 index but just as the company reaches this pinnacle the dot-com bubble that helps Nortel hit this high pops you see Waldorf oval is banking on an endless demand for fiber optics the market is quickly saturated with unused infrastructure causing the man to dry out as the broader tech industry slows down next thing you know North Hall is facing a significantly smaller market for its services and in February of 2001 with sales missing expectations Nortel announces that it no longer expects to make money in the coming quarter prompting investors to run for their lives dropping the company's market capitalization from three hundred and ninety eight billion dollars Canadian to less than five billion dollars in just two years nor tells business becomes impaired and the firm is forced to layoff sixty three point five percent of its workforce and what would later become the largest downsizing and Canadian corporate history in come 2003 the company's bright future becomes pitch black but what's this a glimmer of hope it's 2004 and the company reports its first annual profit since 1997 and look the stock is rebounding the day is saved and it's all thanks to management's hard work determination and accounting misrepresentation because the company isn't actually recovering turns out management has just been cutting the numbers using cookie jar reserves to take revenue from past years and shift them into 2003 making it look like the company has returned to profitability which conveniently triggers a 70 million dollar bonus for the executives but regulators call baloney with the Royal Canadian Mounted Police charging nor tells executives with fraud and so with that final money grab exposed the stock returns to its previously scheduled programming plummeting down further as the Canadian Goliath is brought to its knees the next several years would be filled with lawsuits layoffs and losses until January 14th 2009 when Nortel files for bankruptcy protection and on June 26th Nortel shares are delisted from the TSX at a final price of just eighteen point five cents a share down eight point eight percent from their IPO price and so Nortel Networks after ten years of struggling proceeds to liquidate the company would remain in bankruptcy purgatory for another eight years after this spending a whopping 2.5 billion dollars on lawyers and accountants and only reaching negotiated settlements in 2017 oh and the executives charged with fraud they get off scot-free keeping millions while employees are left with but a fraction of their promised pensions and benefits well it's been 10 years since Nortel filed for bankruptcy protection it remains a baffling moment in time for many after all who would have thought the missteps in the seat of a few could bring down the largest company in Canadian history thanks for watching nor tell us a story that I've always been pretty interested in because my dad actually worked for the company's R&D division and he was on the front lines through the firm's rise and fall and even though noir tells a story of incredible financial loss it's what actually got me interested in the stock market so thanks dad for being a part of history and guiding me to where I am today [Music] [Music] you

Channel: The Plain Bagel

Views: 182,796

Rating: 4.9452701 out of 5

Keywords: Nortel Networks, The Plain Bagel, The Tech Bubble

Id: EKjAMxzdrHw

Length: 5min 55sec (355 seconds)

Published: Fri Jan 11 2019

Reddit Comments

[u/bigheyzeus]

Boomers milking it dry