Nortel Brand Check-up: Trust Was the Product
Nortel is gone. In 2000 the Canadian telecom equipment maker made up over 35% of the TSE 300 index and was valued at about C$366 billion. In January 2009 it filed for creditor protection, and its shares last traded on the TSX at 18.5 cents. We look at how a supplier that sold reliability to network operators lost the confidence its brand was built on.
Key takeaways
- Nortel’s shares fell from an intraday peak of C$124.50 in July 2000 (C$1,245 adjusted for a 2006 consolidation) to a last TSX trade of 18.5 cents in June 2009.
- The company spent US$19.7 billion on acquisitions in 2000, then cut its 2001 revenue growth forecast from 30 to 35% to 10 to 15% in February 2001.
- In our view, restatements and the April 2004 firing of its CEO, CFO and controller for cause damaged the trust that a long-term infrastructure supplier depends on.
- After the January 2009 creditor filing, its patents fetched US$4.5 billion of the US$7.3 billion raised from asset sales, and shareholders were not expected to receive any value.
Download the full Nortel Brand Check-up (PDF): vital signs, timeline, diagnosis, treatment and sources.
What Nortel was at its peak
Nortel made the equipment phone companies and large businesses used to run their networks. On July 26, 2000, its shares hit an intraday high of C$124.50 on Toronto’s stock market. According to The Canadian Encyclopedia, the company made up over 35% of the value of the TSE 300 index, ranked as the ninth most valuable corporation in the world and employed about 94,000 people. The Globe and Mail put its market value at the 2000 peak at about C$366 billion.
In 1998 Northern Telecom announced the US$9.1 billion purchase of Bay Networks and soon took the name Nortel Networks. In 1999 it planned to spend almost $150 million on advertising, at least three times its 1998 budget, and ran a campaign built around the Beatles song Come Together. Chief executive John Roth called his effort to transform the company “a right-angle turn.”
Symptoms
On February 15, 2001, with the quarter half over, Nortel said it would lose $0.04 a share instead of earning $0.16, and cut its 2001 revenue growth forecast from 30 to 35% to 10 to 15%. The rest followed:
- Shares hit 67 cents in October 2002, or C$6.70 adjusted for a 2006 consolidation of ten shares into one.
- In October 2003 the company said it would restate results back to 2000.
- On April 28, 2004, it fired its CEO, CFO and controller for cause and said 2003 net earnings would fall by about 50%.
- In 2006 it agreed to pay US$2.473 billion in cash and stock to settle class-action lawsuits.
- In December 2008 it called itself “a viable partner for the long term”.
On January 14, 2009, Nortel filed for creditor protection in Canada and the U.S. Its shares had closed at 38.5 cents on the TSX the day before and changed hands at 11 cents that day. They last traded on the TSX at 18.5 cents on June 19, 2009.
Diagnosis
Growth was tied to one spending cycle. Nortel spent US$19.7 billion on acquisitions in 2000, at the top of the telecom boom. When demand turned, its forecast broke mid-quarter.
The brand story ran ahead of the business. The 1999 campaign set out to recast a maker of old-line phone equipment as a supplier for the Internet age. By January 2000 Nortel was Canada’s largest corporation by market value. A promise that large needs results to match.
Trust in the numbers broke. For a supplier whose equipment customers plan to run for years, reported results are part of the product promise. The restatements and the 2004 firings damaged that promise, even though a court acquitted the three former executives of fraud charges in January 2013.
Customers could not plan around it. In June 2009, as Nortel moved to sell all of its businesses, one analyst told customers to go ahead with purchases already budgeted but to review plans beyond the immediate budget year.
Treatment it needed
A regular marketing audit asks whether the story a company tells matches what customers buy and what the numbers show. Nortel needed to spread its revenue so one buying cycle could not sink its guidance, make only brand claims its results could support, and treat clean reporting as part of the brand. When survival doubts surfaced in late 2008, it needed a specific public plan for customer support.
Prognosis
Flatlined. Nortel sold its businesses after the 2009 filing. In 2011 a consortium of Apple, EMC, Ericsson, Microsoft, Research In Motion and Sony paid US$4.5 billion for more than 6,000 patents and patent applications. Asset sales raised a total of US$7.3 billion, and Nortel said it did not expect common shareholders to receive any value. In January 2017 judges in Delaware and Canada approved a plan to pay more than US$7 billion to creditors.
What growing companies can learn
Nortel’s collapse started as a finance story, but customers felt it as a brand failure. Know how much of your revenue depends on one group of buyers. Keep your public story inside what your results can prove. And when buyers commit for years, show them early, with evidence, that you will still be there.
This check-up uses public information available on March 5, 2024. It is brand and marketing analysis, not investment advice.
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Brand Doctor is based in Vancouver and offers a free marketing diagnosis to businesses across Canada, in person or remotely. You leave knowing what’s holding growth back and what to fix first.
