Nortel Wields Ax Again

The telecom firm is intent on bringing costs down, but the sales outlook isn't as clear.
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Nortel

(NT)

wowed Wall Street Thursday with yet another decisive swing of the ax.

Taking aim at what it suggests was a pack of crooked execs, the Brampton, Ontario, telecom gearmaker fired seven more top financial officials. The move is the latest development in an accounting scandal tied to the company's overstated first-half 2003 earnings. Thursday's dismissals bring the book-cooking toll in Nortel's executive suite to 10.

The questionable-accounting crowd wasn't the only victim of Nortel's push to clear the decks, though. The company said it would slash 3,500 jobs, or 10% of the workforce, in an effort to bring costs in line with soft sales. Nortel also rolled out what it has called "estimated limited preliminary" first-half results in a move to catch up with years of unfiled financials.

Cheering a long-absent sense of broad progress, investors pushed Nortel shares up 8% in early afternoon action. But beyond its characteristically sharp edge on costs -- the company has seemingly been in one stage of restructuring or another for around four years now -- Nortel offered little evidence that it's got a handle on a tough market for telecom gear.

"Overall, there were no major surprises," says CIBC World Markets' analyst Steve Kamman, explaining Wall Street's bullish turn on a stock that is down more than 50% from this winter's prescandal highs. "It's clear that Nortel will be shuffling people around and restructuring for the next six months." Kamman has a neutral rating on the stock, and Nortel is a CIBC banking client.

Nortel rose 29 cents to $3.89.

Bonus Babies

The most dramatic development, aside from the well-telegraphed staff cuts, came in Nortel's decision to

fire an additional seven finance officers and vow to recover their potentially ill-gotten bonuses. A review of the books showed that previous management had

fluffed up earnings by about $300 million last year, with three-quarters of that sum appearing in the first half of the year. Not so coincidentally, perhaps, Nortel last year began sharing with workers a pool of more than $50 million in

bonus money riding on the company's return to profit.

In addition to former CEO Frank Dunn, ex-CFO Doug Beatty and onetime controller Mike Gollogly, who were dismissed in April, Nortel said Thursday it fired seven more finance officials in connection with the improper accounting.

"This is not a wishy-washing restructuring -- it's extremely decisive," says Lehman Brothers analyst Steve Levy. He has a neutral rating on the stock, and Lehman has no underwriting ties to Nortel.

Levy, who

first flagged something amiss with Nortel's surprising return-to-profit numbers in early 2003, applauded the action.

As Levy points out, it was former CEO Dunn who said in July 2002 that the company's restructuring phase was over. According to Dunn, that meant the layoffs could stop and that the business had

turned a corner. At that point, the company had cut two-thirds of its staff from peak levels in 2000.

Unlike rivals

Lucent

(LU)

and

Tellabs

(TLAB)

, which stuck with restructuring plans and kept trying to align costs with sales, Dunn set Nortel along a path aiming at increased market share and sales growth. Less than a year later, the company shocked -- and momentarily pleased -- Wall Street with a

questionable swing to profit.

Those profits turned out to be bogus, the company has now admitted. And because of those actions, "they have to go through a gut-wrenching second restructuring," says Levy.

The company said Thursday that it wants to be paid back about $10 million in bonuses that the 10 executives received.

Dunn declined to comment, and his attorney Tom Heintzman wasn't available for immediate comment.

Halfway There

But some Wall Street observers wonder how much the company is willing to spend to recover the money. And others, including Levy, question how the company could limit its collection efforts to 10 executives when every employee got a return-to-profit bonus.

A Nortel representative didn't return a call seeking comment.

Though Nortel offered little by way of outlook for the business, it was clear from the estimated limited preliminary numbers for previous quarters that its conventional wireline gear business and sales of communications equipment to companies continue to be weak. Meanwhile, the wireless infrastructure operation is looking more solid.

The company says it will complete its audit for the prior three years and file restated financials by the end of September.

Levy says the company is not out of the woods and is likely to be the subject of many more negative headlines related to shareholder lawsuits and legal battles. He adds that the preliminary report Thursday "helps us understand the underlying profitability better, but not completely."