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Nortel

Nortel Networks Corporation (), formerly known as Northern Telecom Limited and sometimes known simply as Nortel, is a multinational telecommunications equipment manufacturer headquartered in Toronto, Ontario, Canada.

History

Origins

In 1895, Bell Telephone Company of Canada decided to spin off its manufacturing arm to build phones for sale to other companies as well as other devices such as fire alarm boxes and street call boxes for police and fire departments. This company was incorporated as the Northern Electric and Manufacturing Company Limited. In 1900, the new company began manufacturing the first wind-up gramophones that played flat discs. In 1913, the company's headquarters and main factory was built in Montreal. In 1914, the company merged with Imperial Cable to form Northern Electric, co-owned by Bell Canada and the U.S. company Western Electric. By the end of World War I, Northern Electric had become a major distributor of Western Electric appliances across Canada.

In 1922, Northern Electric started manufacturing radios. In 1928, it produced the first talking movie sound system in the British Empire for a theatre in Montreal.

Independence from Western Electric

In 1949, an antitrust suit in the U.S. forced AT&T/Western Electric to sell its stake in Northern Electric to Bell Canada. Deprived of its Western Electric tie, Northern began developing its own products. In 1953, Northern Electric produced its first television sets using tubes made by RCA. Bell Canada acquired 100 percent of Northern Electric in 1964; through public stock offerings starting in 1973, Bell's ownership of Northern Electric and its successors would be reduced, though it continued to have majority control.

In 1966, the Northern Electric research lab, Northern Electric Laboratories (the predecessor to Bell-Northern Research), started looking into the possibilities of fiber optic cable, and in 1969, began work on digitizing telephone communications. Also in 1969, Northern began making inroads into the U.S. market with its switching systems. In 1972, it opened its first factory in the U.S. in Michigan. In 1975, Northern began shipping its first digital switching systems, one of the earliest such systems to be sold.

Northern Telecom and "Digital World"

In 1976, the company name was changed to Northern Telecom Limited, and management announced its intention to concentrate the company's efforts on digital technology.

Digital World was Northern Telecom’s daring declaration, made public by a three-page advertisement that appeared in major trade publications in 1976, that digital technology was the key to the future. It was the first to announce, and to deliver, one year ahead of schedule, a complete line of fully digital telecommunications products. The most well-known of that Digital World product family, the DMS-100, a fully digital central office switch serving as many as 100,000 lines, was a key contributor to the company’s revenue for close to 15 years.

In 1977, Nortel introduced its DMS line of digital central office telephone switches, providing explosive growth for the company, especially after the AT&T breakup in 1984. Northern Telecom became the first non-Japanese supplier to Nippon Telegraph and Telephone, and the company took advantage of opportunities in Europe and China.

Deregulation and the optical boom

In 1983, due to deregulation, Bell Canada Enterprises (later shortened to BCE) was formed as the parent company to Bell Canada and Northern Telecom. Bell-Northern Research was jointly owned 50-50 by Bell Canada and Northern Telecom. The combined three companies were referred to as the tricorporate.

As Nortel, the streamlined identity it adopted for its 100-year anniversary in 1995, the company set out to dominate the burgeoning global market for public and private networks.

In 1998, with the acquisition of Bay Networks, the company's name was changed to Nortel Networks to emphasize its ability to provide complete solutions for multiprotocol, multiservice, global networking over the Internet and other communications networks. As a consequence of the stock transaction used to purchase Bay Networks, BCE ceased to be the majority shareholder of Nortel. In 2000, BCE spun-out Nortel, distributing its holdings of Nortel to its shareholders. Bell-Northern Research was gradually absorbed into Nortel, as it first acquired a majority share in BNR, and eventually acquired the entire company.

After the Internet bubble

In the late 1990s, stock market speculators, hoping that Nortel would reap increasingly lucrative profits from the sale of fibre optic network gear, began pushing up the price of the company's shares to unheard-of levels despite the company's repeated failure to turn a profit. Under the leadership of CEO John Roth, sales of optical equipment had been robust in the late 1990s, but the market was soon saturated. When the speculative telecom bubble of the late 1990s reached its pinnacle, Nortel was to become one of the most spectacular casualties.

At its height, Nortel accounted for more than a third of the total valuation of all the companies listed on the Toronto Stock Exchange (TSX). Nortel's market capitalization fell from C$398 billion in September 2000 to less than $5 billion in August 2002. Nortel's stock price plunged from C$124 to $0.47. When Nortel's stock crashed, it took with it a wide swath of Canadian investors and pension funds, and left 60,000 Nortel employees unemployed.

CEO John Roth retired under controversy to be succeeded by former CFO Frank Dunn. Despite some initial perceived success in turning the company around, he was fired for cause in 2004 after being accused of financial mismanagement. Dunn and other former Nortel officers have been accused of engaging in accounting fraud by the SEC (for more information, refer to "Accounting scandal").

Retired United States Admiral Bill Owens was hired as the CEO to replace Dunn. In late 2004, Nortel Networks returned to using the Nortel name for branding purposes only (the official company name was not changed).

Nortel acquired PEC Solutions in June, 2005, renaming it Nortel Government Solutions Incorporated or NGS. The wholly-owned subsidiary provides information technology and telecommunications services to a variety of government agencies and departments.

On August 17, 2005, LG Electronics and Nortel signed an agreement to form a joint venture to offer telecom and networking solutions in the wireline, optical, wireless and enterprise areas for South Korean and global customers. Nortel owns 50 percent plus one share in the joint venture.

Mike Zafirovski as CEO

Mike S. Zafirovski replaced Owens as president and CEO on November 15, 2005.

In February, 2007, Nortel announced its plans to reduce its workforce by 2,000 employees, and to transfer an additional 1,000 jobs to lower-cost job sites. A year later, in February, 2008, Nortel again announced plans to eliminate 2,100 jobs, and to transfer another 1,000 jobs to lower-cost centres. As part of the reductions, Nortel announced it would shut down its Calgary campus by 2009.

Products

Nortel makes telecommunications and computer network equipment and software. They serve both general businesses and communications carriers (landline telephone, mobile phone, and cable TV carriers). Technologies include telephony (voice) equipment of all kinds, optical fiber, local wireless, and multimedia.

Past and present products include:

Telephone systems

Digital Multiplex System large-scale carrier-grade phone switch
Nortel Meridian medium-to-large-scale PBX
Meridian Norstar small-to-medium-scale digital key telephone system
Nortel Communication Servers, medium-to-large-scale VoIP PBX
SL1, an obsolete PBX
SP-1 switch, an obsolete carrier switch

Telephone sets and terminals

Nortel business phones, digital sets for Meridian and Norstar
Northern Electric home phones
Northern Telecom home phones
Nortel payphones

LAN and MAN equipment

Baystack and ERS (Ethernet Routing Switch), managed network switches for Ethernet
Multiservice Switch (formerly Passport)
Metro Ethernet Routing Switch 8600
Nortel Secure Network Access (switch and software)

Other WAN equipment

1 Mbit/s modem

Software

Corporate information

Business structure

As of February, 2008, Nortel employs approximately 32,550 people worldwide, including 6,800 employees in Canada and 11,900 in the United States. Nortel operations are divided into the following segments:

Carrier Networks (CN): Mobility networking solutions, including CDMA, GSM, and UMTS, and carrier networking solutions, both circuit and packet based.
Enterprise Solutions (ES): Enterprise networking solutions, including circuit and packet based voice, data, security, multimedia messaging and conferencing, and call centres.
Metro Ethernet Networks (MEN): Optical and metropolitan area networking solutions, for carrier and enterprise customers.
Global Services (GS): Services in four areas: network implementation, network support, network management, and network applications (including web services).

Headquarters

As of October 25, 2005, the company relocated its headquarters from Brampton, Ontario in the Greater Toronto Area to 195 The West Mall in western Toronto, in the former city of Etobicoke. The Brampton offices were sold to media-telecom giant Rogers Communications for C$100 million. The company has other key locations across Canada including its R&D headquarters in Ottawa.

Global worksites, partners, and customers

Nortel expanded into the U.S. in 1971. Today there are employees in over 100 locations in the U.S. with R&D, software engineering, and sales centers in many states including California, Florida, Georgia, Illinois, Maryland, Massachusetts, North Carolina, Texas, and Virginia. Nortel's full service R&D centres are located in Ottawa (its R&D headquarters), Beijing, and Guangzhou. In Canada, Nortel also has R&D sites in Montreal, Belleville, and Calgary. In the United States, Nortel's major R&D sites are in Research Triangle Park (North Carolina), Richardson (Texas), Boston, and Santa Clara.

Nortel has significant presence in Europe, Middle East, Africa, the Caribbean, and Latin America. Nortel delivers network infrastructure and communication services to customers across Asia in Mainland China, Hong Kong, Taiwan, South Korea, Japan, Singapore, Thailand, Malaysia, India, Pakistan, Australia, New Zealand, and Turkey (Nortel owns 53.17% of Nortel Netaş, originally established as a joint venture with Turkish PTT in 1967). In addition, the company has three joint ventures in the People's Republic of China, including Guangdong Nortel Telecommunications Equipment (GDNT), who operates Nortel's full service R&D centres in China.

Corporate governance

Current members of the board of directors of Nortel Networks:

Harry Jonathan Pearce, chairman of the board
Jalynn H. Bennett, CM
Dr. Manfred Bischoff
Hon. James B. Hunt, Jr.
Kristina Johnson
Hon. John P. Manley
John Alan MacNaughton
Richard David McCormick
Claude Mongeau
John D. Watson
Mike Zafirovski, president & CEO

Former members of the board of directors of the company include:

Robert Ellis Brown
John Cleghorn
Robert Alexander Ingram
James Blanchard
Yves Fortier
Guylaine Saucier
Sherwood Smith
Lynton "Red" Wilson, former chairman of the board
Frank C. Carlucci, former chairman of the board

Accounting scandal

Nortel shares soared in the late 1990s and collapsed in 2002 along with the technology bubble. Nortel then reported a return to profitability in early 2003, following a promise to do so by chief executive officer Frank Dunn.

In late October 2003, Nortel announced that it intended to restate approximately $900M of liabilities carried on its previously reported balance sheet as of June 30, 2003, following a comprehensive internal review of these liabilities (“First Restatement”). The Company stated that the principal effects of the restatement would be a reduction in previously reported net losses for 2000, 2001, and 2002 and an increase in shareholders’ equity and net assets previously reported on its balance sheet.

Nortel unveiled details of additional accounting errors involving billions of dollars and said that a dozen of the company's most senior executives would take the unusual step of returning $8.6 million, millions of dollars of bonuses they were paid based on the erroneous accounting.

At Nortel, investigators ultimately found about $3 billion in revenue had been booked improperly in 1998, 1999, and 2000. More than $2 billion was moved into later years, about $750 million was pushed forward beyond 2003, and about $250 million was wiped away completely.

Five directors stepped down. Nortel's board has faced criticism for allowing the company's accounting fiasco to go on and approving the bonus plans, but none of the five directors were accused of wrongdoing in a company investigation.

This accounting controversy eventually led to the departure of ten Nortel executives in 2004. Dunn, chief financial officer Douglas Beatty, and controller Michael Gollogly were fired.

Nortel filed with regulators its financial statements for 2003 and restated, for the second time, its results from earlier years. Securities regulators, the U.S. Securities and Exchange Commission, the Royal Canadian Mounted Police and the U.S. Attorney's office were conducting probes during this same period.

On June 19, 2008, the RCMP charged Dunn, Beatty, and Gollogly with criminal fraud related to their activities in 2002–2003.

Settling of litigation

In 2007, the Securities and Exchange Commission filed civil fraud charges in the U.S. District Court for the Southern District of New York against Nortel Networks Corporation and its principal operating subsidiary Nortel Networks Limited (Nortel) alleging that Nortel engaged in accounting fraud from 2000 through 2003 to close gaps between its true performance, its internal targets and Wall Street expectations.

Without admitting or denying the Commission's charges, Nortel agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws - namely, Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b-5, 12b-20, 13a-1 and 13a-13. Nortel also has agreed to pay a $35 million civil penalty, which the Commission will seek to place in a Fair Fund for distribution to affected shareholders, and to report periodically to the Commission's staff on its progress in implementing remedial measures and resolving an outstanding material weakness over its revenue recognition procedures.