Nortel......price plummets
TORONTO (CP) - Nortel Networks fired three top executives Wednesday in a shocking announcement linked to financial irregularities that have forced Canada's biggest technology company to restate several years' worth of results.
Besides firing CEO Frank Dunn and two others, the company said it will slash its reported 2003 earnings in half after an audit committee took a closer look at the firm's books. Nortel's finances are being investigated by U.S. and Canadian securities regulators. The RCMP have also made informal inquiries, though a full police investigation has not been confirmed.
The dramatic moves, announced before stock markets opened, stunned investors who sold off Nortel shares (TSX:NT), pushing the stock down 27 per cent to $5.55, cutting Nortel's total market value by more than $8 billion in a matter of hours.
In addition to the firing of Dunn, a former chief financial officer who took over the company in 2001, Canada's giant maker of telecom equipment gear also removed former CFO Douglas Beatty and former controller Michael Gollogly - both of whom had been on paid leave.
Four other unnamed senior financial executives were put on paid leave Wednesday.
The firings completed one of the biggest corporate housecleanings in Canadian history and reflect growing pressure on companies to clean up the accounting irregularities that have caused numerous financial scandals in the business world - from the collapses of Enron and WorldCom to the Martha Stewart insider trading case.
Last year, Nortel restated more than three years of financial results and is now conducting a second review about what went wrong. Many analysts expect more restatements.
In making such sweeping executive moves, Nortel is trying to assure investors that it will survive and can recover some of the lustre the company had when it was Canada's richest company and a stock market and held by millions of investors in their stock portfolios.
"This company is fundamentally strong," new CEO William Owens, a former U.S. admiral, said in a conference call with analysts, noting Nortel has good "momentum" in key businesses and about $3.6 billion US in cash in its treasury.
Nortel had been scheduled to release on Thursday its financial reports for the January-March period of 2004. The release of that report has been delayed pending the ongoing investigation.
The Brampton, Ont., company was battered by the collapse of the telecom industry demand and the bursting of the technology bubble in 2001. But, like other companies, it has been dragged down by concerns over accounting measures that have inflated revenues and made the company look stronger than it is.
"The board of directors believes that the actions announced today are about accountability for our financial reporting and are in the best interests of the company and all of its stakeholders, including our investors, customers and employees," Nortel chairman Lynton (Red) Wilson said in a release.
"These actions are an important step in the process of restoring confidence in the company's leadership and financial reporting."
New CEO Owens, a Nortel director since February 2002, was once the second-highest ranking military officer in the United States. He was vice-chairman of the U.S. Joint Chiefs of Staff and commanded the U.S. Sixth Fleet during Operation Desert Storm.
Wilson, Owens and chief financial officer William Kerr, citing the ongoing investigation, refused to disclose many specific details in a conference call with analysts after the announcement.
The company said it doesn't expect a material change to its previously reported revenues in prior periods.
However, the company added that Nortel appears to have had a net loss for the first half of 2003, ended June 30, instead of the previously announced profit for that period.
Kerr said the independent review is focusing on how and when expenses were either recognized or allowed to accrue for recognition in later financial statements.
"Accruals are part of our cost structure, right across the company and would affect - potentially - any element that involves cost. And it's a timing issue," Kerr told analysts.
Dunn had vowed repeatedly that Nortel, which lost billions of dollars in previous years, would be profitable by that point and executive bonuses were tied to achieving profitability in 2003. On Wednesday, Nortel said it would cut its preliminary 2003 net earnings by about 50 per cent.
Asked by an analyst whether the investigation was looking into the possibility of fraud, Wilson replied that "it would be inappropriate to provide specifics."
Nortel general counsel Nicholas DeRoma said the company is "unaware of any current police investigation. If there is one, we'll co-operate, as we have already with the regulatory authorities, and inform people as appropriate."
Ross Healy, president of Strategic Analysis Corp., said there can be a great deal of subjective judgment used when deciding on whether a financial statements immediately recognize expenses or revenues or let them accrue.
"Depending on how hard a line you want to take from an accounting perspective, I guess you could change anybody's numbers - but particularly with a contract manufacturer, like Nortel, you can change the numbers quite dramatically," Healy said.
While Healy was among Nortel's most outspoken critics during its boom years, which ended abruptly in 2000-2001, he said Wednesday that Dunn had done a good job of cutting costs and reviving the battered company since he was promoted from chief financial officer to CEO in late 2002.
"I think I will stand on my forecast that when all of the numbers are out and said and done, that Frank Dunn did a damn good job," Healy said.
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And if they go down, you dont lose a whole lot.
