Nortel Networks Corp

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NORTEL NETWORKS CORP.

Nortel Networks Corp. is world's second largest manufacturer of telecommunications equipment. The Ontario, Canada-based firm spent billions of dollars in the late 1990s investing in Internet technology. The telecommunications industry slowdown that began in North America in 2000 prompted Nortel to take a $19.2 billion loss—the second-largest quarterly loss in worldwide corporate history—in the second of quarter of 2001. The firm also laid off nearly 30,000 employees, cutting its work force by nearly one third.

EARLY HISTORY

In 1882, the Bell Telephone Company of Canada, based in Montreal, founded a manufacturing arm to develop telephone equipment for the company. The new unit had 13 employees. Three years later, the Northern Electric & Manufacturing Co., Ltd. was founded in Canada. Northern Electric took over the making of telephone equipment for Bell Telephone in 1895. Western Electric Co. acquired a minority stake in Northern Electric & Manufacturing in 1906, and seven years later, Northern Electric and Western Electric Co. agreed to share patents.

Northern Electric & Manufacturing Co. merged with Imperial Wire and Cable Co. to form Northern Electric Company, Ltd. in 1914. Bell Telephone retained a 50 percent stake in the new firm, while Western Electric held the remaining shares. Northern Electric continued to grow as a telephone equipment provider throughout the 1920s and 1930s. In the late 1940s, the firm erected a facility to manufacture electronic switchboard and key equipment. Bell repurchased the shares of Northern Electric from Western Electric in 1962; as a result, Northern Electric began to operate as a wholly owned subsidiary of Bell. Northern Electric extended its reach overseas for the first time in 1967, when it established a plant in Turkey. The firm also began developing its first switching systems.

EMERGENCE AS A WORLDWIDE TELECOMMUNICATIONS LEADER

In 1971, Northern Electric founded Northern Telecom Inc. as a wholly owned subsidiary to make and market telecommunications equipment in the U.S. The following year, Northern Telecom opened its first U.S. manufacturing plant, a unit in Port Huron, Michigan, that produced telephone sets, key systems, and related equipment. Northern Electric began listing its shares on the New York Stock Exchange in 1975, roughly two years after completing its initial public offering. Northern Electric also expanded its international operations with the creation of Northern Electric of Canada (U.K.) in London, England. Northern Electric Export Corp. was created that year as well. Northern Electric changed its name to Northern Telecom Ltd. in 1976. All of the firm's subsidiaries also changed their names. By the end of the decade, revenues had surpassed $1.5 billion. According to an October 1998 article in The Financial Post, the 1970s proved to be a turning point for the firm when its parent company ordered the firm to develop a line of digital switching equipment in an extraordinarily short amount of time. "Bell's customers were telling it that the time had come to switch from analogue to digital technology, which transmits voice traffic after first translating it into the computer language of ones and zeros. Nortel's success in responding to Bell's marching orders ultimately put it on the map as a telecom pioneer, with the world's first complete line of fully digital telecom equipment." The new product line was dubbed Digital World.

In 1981, Northern Telecom launched Display-phone, a telephone model which permitted both voice and data communications to take place in a single unit. That year, the firm began working with AT&T Corp. to develop the DMS-200 system, a long-distance switching system which routed both direct dial and operator-assisted calls between cities. The new system was designed for use in the Bell Telephone network. In January of 1983, MCI purchased 62,000 miles of fiberoptic cable from Northern Telecom to augment its long-distance service between New York and Washington, D.C. The deal marked the largest fiberoptic supply agreement ever reached with a single company. In 1985, when Nippon Telegraph and Telephone contracted Northern Telecom for $250 million worth of DMS-10 switching systems, Northern Telecom became the first non-Japanese telecommunications equipment vendor to serve Japan's public telephone system.

Northern Telecom forged its first major computer-related deal in January of 1986 when the firm began supplying networking equipment for Apple Computer's Macintosh machines. The following year, it acquired a 24 percent stake in British communications and information systems supplier STC. PacTel Communications Co. and Northern Telecom established PacTel Meridian Systems, a joint venture selling and servicing Northern Telecom's Meridian line in California and Nevada, in 1988. The firm strengthened its foothold in Asia that year via an alliance with China's Tong Guang Electronics Corp.

The lines between the telecommunications and computer industries began to blur for Northern Telecom in the early 1990s as the firm began developing products that targeted both markets. For example, Northern Telecom unveiled Meridian TeleCenter, a software productivity tool that linked its digital lines with Macintosh machines, allowing users to use their computers for phone calls. In 1991, Northern Telecom, South Central Bell, Apple, IBM Corp., and ADC Telecommunications began working on a distance learning project dubbed the Mississippi 2000; eventually, the program connected four high schools to institutes of higher learning to allow video-based computer instruction over the public telephone network. The firm also acquired the shares of STC plc it did not already own. The following year, Motorola Corp. and Northern Telecom agreed to work together to sell and service cellular telephone networks in Canada, Central and South America, the Caribbean, and the U.S.

The Republic of Tunisia awarded a $40 million telecommunications equipment contract to Northern Telecom in 1994. The firm also secured a $100 million telecommunications equipment contract from the builders of a personal communications systems (PCS) network in the U.K. Northern Telecom changed its name to Nortel in 1995; eventually research and development design groups were consolidated into a single division, Nortel Technology. International growth continued with the creation of a unit in Moscow, Russia. In a contract valued at $1 billion, Sprint Spectrum LP hired Nortel in 1996 to develop PCS networks. The following year, Telewest Communications PLC hired Nortel to produce digital hierarchy transmission equipment.

FOCUS ON THE INTERNET

When CEO John A. Roth took the reins of Nortel in 1997, the firm "was in danger of being eclipsed by fleet-footed rivals serving up Net gear," wrote BusinessWeek Online columnist Joseph Weber. Recognizing this, Roth began working to transform the telecommunications equipment giant into a maker of cutting edge Internet equipment. Nortel launched an acquisition spree in 1998, buying Broadband Networks Inc., Aptis Communications, Inc., and Cambrian Systems Corp. The firm also completed its largest deal to date, paying $6.9 billion for Bay Networks, Inc., the world's third largest data and Internet networking equipment vendor. According to Weber, "Bay brought Nortel top-notch technology, setting it up to compete in a brave new world where phone and data networks are fast converging."

In the late 1990s, Nortel began to release several Internet-based products. For example, the Meg-1 modem allowed telephone companies to offer high-speed Internet access to consumers. The firm's Succession system combined traditional telephone equipment with Internet gear, appealing to clients wanting to gradually increase their Internet capabilities. E-commerce products and services included online configuration, as well as ordering and support. In 1999, Nortel added Shasta Networks, Inc., X-CEL Communications, Ltd., and Periphonics Corp. to its holdings. The firm also paid $2.1 billion for Clarify Inc., a customer relationship management software manufacturer. In an effort to boost electronic sales of its products and services, Nortel revamped its Web site. That year, Sweden's national telephone company, Telia, hired Nortel over rival Cisco Systems Inc. to develop Internet-based voice and data equipment for a national network. Similarly, Nortel beat out Lucent Technologies Inc. to supply equipment for a fiber network Jazz Telecom Inc. was erecting in Spain. Purchases continued into 2000 with the acquisition of Dimension Enterprises, Inc., an engineering and business strategy consulting firm; Australian-based Photonic Technologies; Xros, Inc., a switching concern; and CoreTek, Inc., an optical components firm. The $7.8 billion purchase of Alteon WebSystems brought with it the Web switching equipment many analysts predicted would be in great demand. In May of that year, Bell Telephone sold off its remaining 35 percent stake in Nortel to a newly formed holding company, Nortel Networks Corp.

STMicroelectronics paid $100 million for Nortel's semiconductor manufacturing operations in 2001. Nortel revealed plans to increase its European workforce by 10 percent, creating 2,000 high-technology jobs, primarily in the U.K., Ireland, France, Germany, Italy, and Spain. However, when telecommunications spending slowed drastically later that year, the firm actually began cutting jobs. The inventory Nortel had been building in anticipation of increased growth suddenly became a major liability. In the second quarter of 2001, Nortel posted a $19.2 billion loss as it wrote off billions of dollars in excess inventory. The number of layoffs eventually reached 30,000, and Nortel began selling off non-core units, such as its Access Solutions high-speed Internet access products. Like most other telecommunications firms, Nortel planned to outlast the industry downturn, which was predicted to continue well into 2002.