WRAL Tech Wire

Posted Jan. 19, 2007 at 7:36 a.m.

Mr. Z's Plan Working? Well, Nortel Stock Is Up 30% Since Reverse Stock Split

By RICK SMITH

RESEARCH TRIANGLE PARK, N.C. – If you were to hazard a guess about what networking company’s stock has soared 30 percent over the past six weeks, which one would it be?

How about Nortel?

That’s right.

Nortel (NASDAQ: NT) shares have jumped to $27.07 as of Thursday’s close from $21.15 since Chief Executive Officer Mike Zafirovski executed a reverse 10-for-1 stock split as part of his turnaround strategy.

In fact, a little more than a year into the massive turnaround job, Mr. Z is feeling confident enough that he’s now talking about making acquisitions rather than rebuilding. He told Reuters this week after a press conference where he and Microsoft CEO Steve Ballmer touted forthcoming joint products that Nortel is now “stable.”

“I am much more comfortable that we have a foundation in place right now within Nortel from an operational and financial processes standpoint,” Reuters quoted him as saying. Nortel is no longer “gun shy” about shoppimng and is “looking at some opportunities.”

Duncan Stewart, writing in The National Post, is among those who also believe Nortel is turning around.

“There haven't been a lot of reasons to be bullish on Nortel for a while,” he wrote this week, citing Nortel as a “dog” stock when compared to fellow Canadian firm Research in Motion.
“Restructurings, settlements of lawsuits and up-to-date financials are necessary things, but not inspiring,” he added. “The new CEO is impressive -- but Mike Z can't do it without the right products.”

Stewart, a former analyst who followed Nortel stock, said Nortel could be ready to surprise people. He noted the jump in Nortel’s stock and cited the company’s announced Ethernet deal with British Telecom as part of that company’s aggressive 21st Century Network project as a reason for hope.

BT selected Nortel’s emerging Ethernet technology, known as Provider Backbone Transport, or PBT. The deal is estimated to be worth only tens of millions of dollars, which is small when compared to other contracts such as Nortel’s $2 billion contract with Verizon for network upgrades that was announced in December. However, BT’s endorsement of PBT could trigger more interest in the product with other carriers, according to TD Securities analyst Chris Umiastowski.

“This technology could well create meaningful value for Nortel’s shareholders over time, and we show how it could add $4 to the company’s stock price,” he wrote. “For this to happen the technology would have to gain widespread adoption and Nortel would have to gain significant market share.” He then cited a variety of technologies where Nortel has been successful in the past. “It could happen again,” he added.

While Nortel didn’t win a share of Sprint’s mobile WiMAX network package (a technology Mr. Z has touted as a point of emphasis), it has secured contracts in Taiwan and Japan for similar projects.

Analysts and potential customers also turned out in force in New York for the Ballmer-Mr. Z road show. The two companies announced last July a joint effort to drive Internet and voice products.

Their first three offerings focus on combining voice, e-mail, instant messaging and video built around Internet Protocol standards. And the partnership is already winning customers, the CEOs said.

From the start, Mr. Z said the Microsoft deal would generate $1 billion or more.

Analysts remain cool to the stock overall, with 24 of 33 surveyed by Thomson/First Call rating NT as a “hold.” Six call it a “buy.” Two say NT is a “strong sell” and another “sell.”

But Mr. Z now has his management team in place, new products in the market and more in the pipeline, and a few deals to tout.

At least for the moment, the stock is no longer a “dog.”
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