Evaluation The Rise And Fall Of Nortel Case Study

Length: 4 pages Sources: 4 Subject: Sports - College Type: Case Study Paper: #47726419 Related Topics: Gaap, Telecommunications, Deregulation, Bankruptcy
Excerpt from Case Study :

¶ … Rise and Fall of Nortel

Factors Contributing to the Nortel's Rise and Fall

Nortel Corporation was one of the of largest communication companies in Canada before filing for bankruptcy in 2009. By September 2000, Nortel reached its peak and recorded $390 billion of market capitalization. Several factors led to the rise of Nortel in the 1990s and early 2000s. The Nortel Corporation operated in the broadband and wireless communication segment, and the company took the advantages of the growth in telecommunication and internet in the 1990s to record a tremendous increase in sales. Moreover, Nortel used the aggressive acquisition strategy to achieve its growth rate and by 2000s, the company share's value reached $200. By benefiting the market and regulatory conditions, Nortel recorded a triple in sales and multiple folds in operating profits between 1996 and 2000. Typically, the telecommunication industry recorded a significant boom in 1980s and 1990s leading to the growth of cellular market. By 1987, the United States had more than 1 million cellular subscribers. Moreover, the introduction of personal computer by Macintosh and IBM where millions of businesses took the advantages of the personal computer to subscribe to the internet. In 1995, the subscribers in the United States increased to 25 million. By the end of 1990s, more than tens of billion dollars were poured in the telecommunication industry. Within 3 years, the telecommunication industry installed over 50 million of optical fiber cables in the United States. Typically, the Nortel exploited the growth of the internet technologies as well as the wave of deregulation in the telecommunication industry to achieve a growth rate in the 1990s. Nortel took advantages of the super growth rate in the telecommunication industry and purchase the "San Francisco -- based Bay Networks for U.S. $9.1 billion in a share-for-share deal" ( Fogarty, Magnan, & Markarian, 2011 p 538), and the company recorded a tremendous growth after the acquisition.

The stock price." (Fogarty, Magnan, & Markarian, 2011 p. 539). In the 1990s, the media showered Roth with praise making Nortel to feature in many magazines and newspapers stories. "Many publications featuring Roth echoed sentiments similar to the following: "John Roth is a man of boldness and vision, one who would rather strike than be stricken." (Fogarty, Magnan, & Markarian, 2011 p 539).

Despite Nortel's growth rate in the 1990s, the company experienced a dramatic decline in the share price in the early 2000s making Nortel to file for bankruptcy in 2009. Several factors contributed to the fall of Nortel. First, the company lacked an effective internal control system. (Gompers, Joy & Andrew, 2001). Beneath the Nortel's unsustainable growth rates revealing massive financial irregularities and when these irregularities were opened, its share price dropped from $200 to $0.67. A dramatic rise and fall of the share prices was understood because of the overvaluation of the equities. The concept overvaluation refers to a deviation between the stock price and its underlying value. When overvaluation of stock prices occurs, it leads to an unmanageable organizational process. For example, Nortel recorded $3 Billion worth of false sales in 2001, 2002 and 2003. The move fooled the market and portrayed the impression that Nortel was a bearer of the Canadian Technological advancement. More importantly, Nortel deviated from the GAAP accounting policy making the company's financial irregularities to be covered for several years before they finally opened.

2. Mechanisms put in place to Align Managers with Shareholder's…

Sources Used in Documents:

Reference

Fogarty, T. Magnan, M.L. & Markarian, G. (2011). CASE STUDY Nortel: The Rise and Fall of a Telecommunications Company. Journal of Business Ethics. 8(2):535-547.

Michael C. J. (2005). Agency Costs of Overvalued Equity. Financial Management, 34 (1):5-19.

Gompers, P. A. & Joy, I. & Andrew, M. (2001). Corporate Governance and Equity Prices. NBER Working Paper no. 8449.

Heron, R.A. & Lie, E. (2006). What Fraction of Stock Option Grants to Top Executives?


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