Nortel Networks Corporation was declared bankrupt in 2009 after almost a decade of financial mismanagement by its executive team. In 2008, three former top executives had been charged with fraud for misrepresenting Nortel’s financial results between 2000 and 2004. The company was finally liquidated in 2017, paying out 7 billion dollars to its creditors. So, what happened to Nortel?
Ten years ago, on January 14th 2013, Chief Financial Officer Douglas Beatty, Chief Executive Frank Dunn, and Controller Michael Gollogy were acquitted of fraud charges and later had all charges against them dropped. This marked one of the final chapters in the history of what was once Canada’s largest technology company.
So how did Nortel go from being a market leader in the technology sector turning record profits to going bankrupt and owing billions of dollars? We look at the history of Nortel, the technology that helped them dominate the telecoms industry and what led to their eventual demise.
The history of Nortel
One of the things that makes the collapse of Nortel so tragic is its historic links to telephony. In fact, the company has links that go right the way back to the inventor of the telephone, Alexander Graham Bell. After he invented the telephone in 1876, Bell along with his partners, established the Bell Telephone Company, with the purpose of marketing and selling Bell’s new invention.
The telephones themselves were produced in a separate manufacturing plant, which was eventually incorporated as a new company called The Northern Electric and Manufacturing Company. In 1914 this company merged with a wire and cabling company, also owned by The Bell Telephone Company, called The Imperial Wire and Cabling Company. This new company became The Northern Electric Company, they expanded their product line to include Canada’s first disc-playing wind-up gramophones.
The Northern Electric Company was part-owned by Western Electric, who themselves were owned by AT&T. Northern Electric did not invent any of their own technology at first, instead, they manufactured technology based on designs created by Western Electric. In the late 1950’s Western Electric ended its patent relationship with Northern Electric. At this point, Northern Electric created its own research and development department called Northern Electric Laboratories and began producing its own designs.
In the early 1960s, Western Electric sold its shares in Northern Electric back to the Bell Company, making Bell the majority shareholder. To stay ahead of the competition, Bell Canada and Northern Electric combined their R&D departments to create Bell-Northern Research. It was during this time they began investigating the potential of utilising fibre cables within a telephonic network. Northern began producing some of the earliest part-digital switching systems including the SP-1.
In 1976 Northern Electric changed its name to Northern Telecom Limited, it was also during this period that the company decided to focus its research intentions on digital telecoms technology.
In 1998 Northern Telecom purchased Bay Networks for US$9.1 billion. At the time Bay Networks were one of the market leaders in network router systems and were a direct competitor of other well-known companies such as Cisco. Through their acquisition of Bay Networks, Northern Telecom believed they could cement their position as a global leader in the digital telecoms industry.
They changed their name at the time of the acquisition to Nortel Networks, to reflect this goal.
A Northern Electric Amplifier c.1922
What caused Nortel to crash?
There are several contributing factors, including the rise of the internet, the saturation of the fibre optic market, excessive acquisitions and suspicious accounting which lead to the eventual crash of Nortel. Here we run over some of the key factors.
The saturation of the fibre optic market
Northern Telecom were key players in the roll-out of fibre optics across the globe. After their early research into this technology during the 1960s, they began rolling optics out at an incredible rate. Although this initially helped generate substantial revenue for Nortel, it was not sustainable. The market quickly became flooded as there were fewer businesses to convert to fibre. This in turn meant revenues slowed and eventually stopped in this once profitable area of the business. As a core part of their business model relied on traditional telecoms (rather than IP based communications) there was nothing to fill the void.
The rise of the internet
Before the internet came along, Nortel was a leader in the telecom industry. However, when the internet revolution started to happen, Nortel failed to see the importance of this emerging technology and how it could eventually revolutionise the communications industry.
Nortel believed the internet to be just a fad and even began developing their own alternative to it based on more traditional networking methods like circuit switching rather than recognising the importance of packet switching. By the time Nortel realised that the internet was the future, it was already too late and many other companies had already made a head start on developing technology for it.
Excessive acquisition
After they failed to begin developing their own internet-based technology, Nortel realised they were lagging behind many other competitors in the telecoms sector. Rather than fix this with their own in-house development, the Nortel board went through a period in the late 90s and early 2000s of purchasing several other internet-based tech companies. The first of which was Bay Enterprises, but others such as Qtera Corporation, Clarify, Promatory Communications, Xros, and CoreTek soon followed. This series of purchases helped Nortel appear that they were still successful and their overall revenue slowly began to increase again. Unfortunately, this all came as too little too late. This increased focus on growth, rather than trying to improve their profitability meant that when the dot-com bubble burst, they had inadequate cash flow to help them ride out the trouble.
The burst of the dot-com bubble
When the internet bubble burst in the early 2000s, Nortel was left in a tricky situation. After spending the past few years purchasing smaller telecom companies, they found themselves left with stock in several companies, whose share value had drastically declined. This led to their own stock prices plummeting. On top of this, many of the smaller tech companies they had sold their equipment to also went bust meaning they were left out of pocket on those contracts. This cemented a spiral of financial trouble, they couldn’t get out of.
Bad accounting
After a restructuring of Nortel in 2001 which resulted in almost 60,000 staff being laid off, as well as write downs of over US$15 billion, the fortunes of Nortel finally seemed to be turning around at last. They recorded a profit by early 2003 and paid out large bonuses to key members of the managerial team. Dunn, Beatty and Gollogy received a total of over US$12 billion between them. Unfortunately, all was not what it seemed, these large bonuses raised some eyebrows and independent auditors were brought in to assess the Nortel books.
During this audit, it was found that there had been several accounting errors made since 1998, with over US$6 billion of revenue incorrectly reported between 1998 and 2003. These accounting errors lead to Dunn, Beatty and Gollogy being fired for financial mismanagement and eventually charged with fraud. This scandal also severely knocked investors’ trust in believing Nortel to be a reputable company to deal with, making it harder for them to gain investment to continue their normal operations.
The Nortel Head Office at Moodie Drive in Canada. Photo by Iouri Goussev via Flickr.
What happened to Nortel after they collapsed?
After the accounting scandal of 2003, things kept getting worse for Nortel. The company went through more desperate restructuring, which led to further job losses across the board. They were hit with several investor lawsuits due to their overstating of results in the early 2000s and ended up paying out considerable amounts of shares in the company to settle them.
In 2009 Nortel finally applied for protection from its creditors under chapter 11 of the US bankruptcy code, as well as the 1986 Insolvency Act in the UK. Initially, Nortel planned on trying to raise additional capital to keep the company afloat and return from bankruptcy, but they struggled to do so and the Nortel stock price eventually dropped below C$1.
In June of 2009, Nortel announced they no longer intended to come out of bankruptcy and by the end of 2009, Nortel was delisted from the Toronto stock exchange with each share worth just C$0.185. At its height, they had been worth over C$1100.
Nortel began the process of selling off large portions of their assets to other tech companies such as Ciena, Nokia Siemens and Ericsson, as well as thousands of patent applications, which were sold for over US$4 billion. Various litigations occurred all the way up until 2017 when a final settlement was paid out to creditors.
This marked the end of an almost 150-year history for one of Canada’s biggest-ever companies.
Key products from Nortel
At the height of their technological prowess, Nortel created some technologies that revolutionised the telecoms industry, here we give a quick overview of some of their best and why they changed the game.
Northern Telecom SP-1
The SP-1 (Stored Program 1) was the product that leap-frogged Nortel into the lead over many of its competitors. It used traditional crossbar mechanical switching combined with a computer program to manage the switching process. Although it wasn’t the first SPC (stored program control) switch, which was AT&T’s 1ESS, it still helped put Northern Telecom on the map as a market leader in digital switching. The SP-1 helped bridge the gap between mechanical switching and fully digital PBX systems and helped to drive the changes toward modern telephone switching.
Nortel SL-1 (Meridian 1)
Also known as the Nortel Meridian 1, the SL-1 was the first fully digital PBX telephone system. Unlike many other switching systems of the time, the SL-1 used a fully digital switching system rather than a mechanical crossbar switch. This factor made it a fast and efficient telephone switching solution capable of handling up to 80,000 phone lines as well as offering other cutting-edge functionality including LAN communications and CTI. It was marketed towards medium to enterprise sized businesses due to its incredible flexibility and scalability.
Later iterations of the Meridian 1 were also able to support VoIP services through the addition of additional line or trunk cards meaning they could successfully integrate into modern telecoms networks. The Meridian was one of the most widely used PBX systems in the world and helped secure Nortel’s position as a leader in the telecoms industry.
Nortel Norstar
Sometimes marketed as the Meridian Norstar, this was still a separate system from the Meridian 1. Designed for small to medium businesses, the Norstar was a digital key telephone system able to support over 190 extensions. It featured sub-systems that had been directly influenced by the SL-1, including caller ID and Automatic Call Distribution.
When Nortel sold off its assets, the Norstar was purchased by Avaya. Eventually, Norstar was replaced by the Nortel BCM (Business Communications Manager) which moved away from a digital system to utilising a VoIP format instead.
Nortel DMS-100
Released during the late 1970s, the DMS-100 was part of Nortel’s Digital Multiplex System range of products. It was designed specifically to act as a POTS (Plain Old Telephone Service) system that helped deliver services such as automatic call distribution.
Ongoing support for Nortel products
After the bankruptcy of Nortel, they ceased all support for any hardware or software systems purchased from them. Although some of their assets were sold to other companies such as Alcatel, Ciena and Avaya, many networks were in place that still operated using Nortel technology.
At TXO, we have one of the largest ranges of products available for Nortel networks and can offer a full repair and refurbishment service for many Nortel systems. We also offer support to businesses that are operating Nortel platforms such as the Nortel Meridian.
Contact us today to find out how we might be able to help you.