Evaluation the Rise and Fall of Nortel

¶ … 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 media also contributed to the rise of the Nortel by proclaiming CEO John Roth as "a man of boldness and vision in possession of a Midas touch" (Fogarty, Magnan, & Markarian, 2011 p 538 p 539). Typically, Roth used the media as a promotional channel. Roth also "used press releases to influence public perception of the company 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 Interests

Several mechanisms should have been put in place to protect the interest of the shareholders. First, Nortel ought to have put in place a strong internal control system. The internal control is the process whereby an organization implements an efficiency and effectiveness in financial reporting thereby comply with policies, laws and regulations. Typically, organizational resources should be directed towards preventing frauds ranging from physical assets such as property and machinery and intangible assets that include intellectual properties, reputation and trademarks. The internal control is the process where the board of directors provide a reasonable reporting, operation and compliance. A company should have both the internal auditor and external auditor who should be responsible in verifying an organizational financial reporting. The internal auditors must not be the same person as an external auditor. Agency theory argues that an organization can reduce agency costs by implementing a strong internal control system where the board of director should be independent and elected by the shareholders. (Michael, 2005).

Moreover, the board of director should have a legal binding to protect the owners' interests, and include a financial expert to minimize the possibility of financial irregularities.

An independent board member and presence of a financial expert in the board play a critical role in monitoring an organizational financial reporting. The probability of financial irregularities can be eroded with the presence of a financial expert in the board and an independent board of director. In essence, the independent review committee should have been set up to curb Nortel from non-compliance to the GAAP accounting policies.

3.Description of the Nortel Meltdown- Failure of People

In Canada, people played an important role in the meltdown of Nortel. The company directors deceived the public by publishing fake financial statements and overvalue the company stocks. However, in reality, the values of Nortel were far below the book values. When the news of overvaluation of stocks eventually opened to the public, Nortel's share price fell from $200 to $1. The press also contributed to the fall of Nortel Corporation. When the success company was at its peak, the press was hailing Nortel as the primary contributor to Canadian economic growth. However, when Nortel financial misappropriation was finally opened, the same media exposed the company to the public. In 1998, the Nortel's stock price declined by 20% vaporizing over $9.1 billion worth of market capitalization. Moreover,

financial analysts blindly proclaimed the financial success of the Nortel without scrutinizing the strategy that the company employed in arriving at its buoyant financial statements. Typically, the analysts played an important role in misguiding people. Many people invested in Nortel shares because of the negative advice from the analysts. While the analysts were responsible for the rise in the Nortel stock price, the same analysts spread bad news about the fall of the Nortel's stock to prospective investors making the company stock price to melt down in 2000s.