Lessons Learnt from Nortel’s Demise: How to go from a valuation of $400 billion to 0 in just a few years

Yesterday evening I had the chance to attend the event: “Nortel: The untold story. From innovation, to acquisition to bankruptcy” at the University of Ottawa.

Left to Right: Mr. Peter Chapman, Distinguished Professor Hussein Mouftah, Mr. Peter MacKinnon, Professor Jonathon Calof
Left to Right: Mr. Peter Chapman, Distinguished Professor Hussein Mouftah, Mr. Peter MacKinnon, Professor Jonathon Calof

The presenting team, Peter MacKinnon, Professor Jonathon Calof, Peter Chapman, and Distinguished Professor Hussein Mouftah, discussed the research they completed over the past three years. The comprehensive data was collected through surveys and interviews with former Nortel employees, including Executives, and Nortel customers. The report can be found here: http://sites.telfer.uottawa.ca/nortelstudy

I’ve jotted down notes I gathered from the research presented, with my own slant. I’d like to start a discuss on applying the lessons learnt to existing companies, such as Blackberry.

The question worth billions, what caused the company that was valued at almost $400 billion dollars in 2000, to decline to a value of $5 billion in 2002 –in just two years? The stock was at its peak in 2000, just a few years later it would be worthless.

The answer cannot be found just within those two years; the research team looked into the many years leading up to the collapse. Now, let’s keep in mind that this was once the 2nd biggest company in North America at one point, to take on the task of understanding exactly what happened, was almost certainly no easy one. Pinpointing blame to one area or to individuals would not be fair and would be too easy. Although, through this three-year research study, some light has been shed on Nortel’s areas of weakness, upon interpretation of this data, it can offer lessons to existing businesses.

Influencing factors of Nortel’s demise:

1) Unrealistic Valuation: Nortel acquired companies with their stock. Everytime there was an acquisition, it would increase the stock price. Which makes you wonder if the company was even worth $400 billion in the first place. I believe it was an inflated multiple of the actual worth of the company. So, when the industry suffered, company valuations were corrected. In fairness to Nortel, it may be wrong to say the valuation of the company declined by $395 billion when it was never worth $400 billion in the first place. They were hit hard. With a unrealistic view of their worth, I’m sure their hubris prevented them to imagine such a downfall.

2) Poor Acquisitions Strategy: They knew how to handle the market changes and disruptions, there’s even proof of plans they had written; however, they didn’t execute – they didn’t ask their engineers. However, they did make some acquisitions. They created less than perfect human dynamics by a poor acquisitions plan. They acquired many start-ups for millions/billions. Upon due diligence they found that some of the products didn’t operate as expected; however, continued with the purchase regardless. Ultimately, making the acquired start-up owners millionaires and new Nortel employees. These millionaires sat next to Nortel employees, who probably made $100,000/year, who now had to work on fixing and trying to integrate these newly acquired start-ups. Nortel helped make these startup owners very rich instead of their own people. The researchers also pointed out the need to “trust your own people” as they are more likely to tell you the truth and more relevant information.
In addition, of course, a strategic acquisition can be a lucrative move; however, it’s important to point out Nortel’s culture. They were built on organic growth. It seems their environment couldn’t support the integration of acquisitions.

3) Poor communication and trust between executive team and employees: Nortel’s technology was ahead of its times and simply superior. They had predicted the mobile technology we use today. While Apple launched the first iPhone in 2007, Nortel had a similar prototype 15 years prior. But when the engineers at Nortel presented the idea to the Exec team, the Exec team argued that no one would want to walk around with a phone in their hand!

4) Insufficient R&D: In earlier times, Nortel had parallel R&D projects taking place at once. As budgets got tighter perhaps due to market changes, R&D “efficiencies” (ot a cut of R&D) came into place, which reduced the number of projects, so there was less innovation. I feel as though they stopped taking risks and stood stagnant, becoming a “me too” company, with little differentiation from their competitors, as the research team of this project referred to them. From 2000-2009, if you look at their press releases, you’ll see nothing new, the research team point out. As their money went into legacy projects rather than new projects.

5) Failed to have a global outlook or perhaps emotional decision-making: They seemed to have put more weight on products that sold well in the U.S. rather than understanding the needs of the rest of the world.

6) Forgotten mission and vision and drive to help customers: Miscommunication between their business management and technology management. They had all the answers within their organization, but for some reason they just didn’t act on it. Would we be wrong to assume there was a huge communication issue within the company, perhaps like many large companies? Related to this point, near the end, the company was led by more business professionals over technology professionals. As a result, in decisions that were made, the technology analysis was missing in this technology company.

As entrepreneurs, we constantly hear of these factors. We try to avoid such mistakes. To see such mistakes completely eliminate a company over 100 years old demonstrates that their is no magic involved in keeping a company in-existence and thriving.

Now, with these factors in mind, let’s have a look at Blackberry. Back in 2011, I wrote a post on “How to Fix RIM” (as it was called then). I talked about the opportunity to grow their R&D initiatives to innovate new stuff and the need to have a focused plan.

There hasn’t been much innovation. New products have not been received well. Things have spiraled downwards for them since then. From July 2011 to September 2013, 11 750 employees were laid off, including employees from the R&D department.

However, in December 2014, they received a $750 million deal with Vodafone, a loan backstopped by the Canadian ECA, Export Development Canada.

Blackberry gets to survive. Unfortunately, we’ll never have the chance to see how Nortel’s technology would have done; however, with research findings from Nortel’s case study, more evidence on the key influencing factors of the success of a large company have been made available.

Esha Abrol © March 2015

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