The Globe and Mail

  Just who is to blame for Nortel debacle?


Saturday, March 3, 2001

We had no intention of adding our two cents' worth on the Nortel debacle; after all, we have never owned the stock, so it's no skin off our nose. But so much of what has been written recently is so obnoxiously wrong-headed, that we are unable to resist.

Suddenly Cinderella turns into an ugly sister. In a flash, Nortel's CEO, John Roth, has morphed from Prince Charming to Freddy Kruger. All because he reduced the revenue forecast for this year to 15 percent from 30 percent.

Suppose for a millisecond that the company had a crystal ball welded to the boardroom table. Then why on Earth would an army of analysts be needed to follow the stock? If all they are doing is faithfully transcribing the "guidance" from management, then they are just a bunch of glorified cheerleaders, less useful than the activity on the sidelines in the XFL (Extreme Football League).

Did a single analyst ever question the monstrous special charges that Nortel has made a habit of taking? What does it mean when adjectives like "adjusted" and "normalized" are constantly used to modify concepts like "earnings"? What about that $1.41 billion (U.S.) loss that was reported last quarter? Nothing new, really; the bottom line has been positive for only a single quarter since 1997. Could it be that expenses such as acquisition costs, stock option compensation, inventory writedowns and depreciation of good will are not just the ravings of a coterie of idealistic, anal-retentive accountants, but actually have something to do with a firm's cost of doing business?

If we are to find fault with Nortel, it is because they are consistently optimistic in their outlook, which leaves them vulnerable to disappointment. Why not be a bit more conservative, and then be pleasantly surprised if things work out better? Unfortunately, that may be good advice on Neptune, but financial markets aren't tuned that way on this planet.

If you want to find some prime culprits, blame those who said that interest rates don't matter much to hi-tech companies because most of them don't have a lot of debt. While the vendors may not owe a lot, their customers are in hock up to their eyeballs. Just where do these people think the money came from to buy hundreds of billions of dollars' worth of communication equipment? Box tops?

A year ago we were squawking and waving our arms in this very space that U.S. Federal Reserve Board chairman Alan Greenspan and former Bank of Canada governor Gordon Thiessen were making a terrible mistake by raising interest rates. The economic expansion was full to bursting and rising oil and gas prices were poised to prick the bubble, we opined. People apparently forgot that building the digital infrastructure of the 21st century is as capital-intensive as building dams, railways, roads and airports was in the past. All the talk about "intellectual capital" ignored the fact that money is money, and everything needs to be paid for. Raising the cost of money, with a slowdown on the radar screen, is a dangerous business.

Nortel as an investment? Well now that its share price has been quartered, it still sells at about three times book. The P/E ratio is non-existent because the outfit records losses. The dividend is a piddly 11 cents a share. Hey, this stock could double again, but being major value players within our contrarian bent, there are a myriad of companies with better prospects than this one. One last thought, at the risk of patting ourselves on the back too much. In August we wrote, "bizarre anomalies like Nortel at 35 percent of the TSE 300 will be viewed as the epitome of unfettered market recklessness." This has been partially taken care of by the plummet of Nortel, but methodologies must change so investors dancing with their index and exchange-traded funds don't get burned so quickly in the future.