Target price 0.5$
Time for Nortel investors to face some hard truths
ANDREW WILLIS
awillis@globeandmail.com
November 11, 2008
Nortel Networks is back in survival mode.
The company that endlessly attracts bottom-fishing investors disappointed once again yesterday, with another 1,300 job cuts, suspension of preferred share dividends, and a restructuring that could serve as a prelude to a bust-up. Oh, and CEO Mike Zafirovski announced a $3.4-billion (U.S.) quarterly loss, the worst in seven years.
Nortel has this weird hold on a segment of the investing public that just can't help betting that somehow, some way, a company that sported a $370-billion (Canadian) market capitalization at the height of the tech boom is going to reclaim its glory.
Yet it never happens. Yesterday's loss knocked the stuffing out of Nortel's stock, leaving the company with a $552-million market cap. Mr. Zafirovski's push into the brave new world of IT has run into a crushing market downturn. During the tech wreck, investors learned that the best way to gauge value on these fallen angels was to shift their focus from growth to solvency. It's time to dust off those skills.
Despite the job cuts announced yesterday, and planned asset sales, analysts are saying more radical moves are needed.
"While it's unfortunate that jobs are being eliminated, we'd prefer to see Nortel take more aggressive steps to better secure its operating longevity," said Kris Thompson at National Bank Financial. He was looking for 3,000 job cuts, or 10 per cent of Nortel's work force.
In Mr. Thompson's view, Nortel could put more divisions up for sale. The company is already auctioning off its Metro Ethernet division, which is expected to fetch about $500-million (U.S.).
"Nortel is realigning its business into three distinct verticals. We view this initiative as indication that management is open to divesting all of its business units: Metro Ethernet, Carrier Networks and Enterprise Solutions," said the National Bank Financial analyst,
who has a 50-cent target on a stock that closed yesterday at 94 cents on the NYSE. "By segmenting operations and reporting these three business units separately, we believe that Nortel is better positioned to divest these units."
Keep in mind that the planned Ethernet disposition is controversial, with many Nortel watchers concerned Mr. Zafirovski is axing a unit with solid potential at the bottom of the cycle. Now there is open speculation more arms will need to be chopped off.
It's not at all clear what Nortel will look like when it emerges from this downturn. But long-time followers of this storied Canadian company need to recognize that those lofty dot-com valuations are never coming back.
