When Mike Zafirovski took over the reigns as Nortel Networks Corp.’s chief executive, the company was a mess – sullied by an embarrassing accounting scandal, unprofitable business units and a corporate structure that was terribly out of synch with the telecom equipment industry’s increasingly competitive dynamics.
Over the past two years, Zafirovski has been methodically cleaning house by slashing costs, selling uncompetitive divisions and getting rid of thousands of employees. (Nortel has more than 2,000 employees at its campus in Research Triangle Park, N.C.)
But perhaps the most dramatic changes have happened within the senior executive ranks where Zafirovski has swept out pretty much all of the old regime and replaced them with his people – many of them colleagues from his days with General Electric Corp.
The management overhaul continued last month when long-time executive Steve Slattery was surprisingly replaced as head of Nortel’s enterprise business by Joel Hackney.
Nortel (NYSE: ) also hired a new chief financial officer, Pavi Binning, who had previously been CFO with Hanson PLC and Marconi PLC. He replaces David Drinkwater, who had been interim CFO since Peter Currie left Nortel last April.
While Binning’s appointment was seen as a solid move, Hackney’s promotion caught many off guard because enterprise was one of the few bright spots for Nortel during the first half of the year. Slattery, who worked for Nortel for 20 years, had managed to stick around while many of his peers were shown the door.
Last month, Slattery talked about Nortel’s aggressive enterprise strategy on a conference call hosted by CIBC World Markets. He also answered questions about Nortel’s acquisitions plans, saying that the company has been actively looking at deals for the past 18 months but “we will not overpay for an asset”.
In an interview with Network World, Hackney said Nortel decided it needed new leadership within its enterprise division despite a 23 percent increase in year-over-year sales.
“We just finished our strategy session, and we’re pleased with the progress, but we think there’s a lot more we can do. What we’re focused on is accelerating the progress. It’s all about accelerating the momentum that’s in place,” he said.
Some of the other senior executives pushed aside since Zafirovski took over include: Dion Joannou, Peter Currie, Brian McFadden, Sue Spradley, Susan Shepherd, John Haydon, Clent Richardson and Robert Mao.
When Haydon left last month to become president and chief operating officer with Breconbridge Manufacturing Solutions, UBS analyst Nikos Theodosopoulos described it as “marginally negative” – suggesting analysts have become used to the revolving door within Nortel’s executive suites.
“Since year-end 2006, Nortel has lost its chief ethics officer, CFO, regional presidents for the U.S. and CALA and V.P. of IR – not an encouraging sign for a company in the midst of a critical transformation,” Theodosopoulos wrote in a research report.
Hackney’s promotion to head of the enterprise business from his previous role as senior VP, global operations, is a strong indication of Zafirovski’s willingness to make what he sees as the necessary strategic moves.
Known as a blunt, outspoken executive, Hackney found himself in the spotlight earlier this year after a university student charged him with assault following a road rage incident in a parking lot following a basketball game. The student, Alicia Ogden, alleged that Hackney got out of his SUV and grabbed her face after she apparently cut him off.
The charges were dropped after Hackney complied with several requirements, including donating $500 to a domestic violence prevention center, performing at least 50 hours of community service and getting an anger management assessment.
Nortel spokesman Mohammed Nakhooda said the series of senior management changes reflect Zafirovski’s goal to recreate a “great company”
“Recent moves and changes with the executive ranks is about making sure we have the right leaders in the right roles at the right time – something that is critical for us to compete and win at this stage of Nortel’s transformation,” he said.
“Yesterday’s appointment announcement is a perfect example of putting the right person in the right role at the right time. Now is the time for Nortel to take its enterprise business to the next level, build on our momentum and take a stronger leadership position in the market.”
Despite the overhaul of Nortel’s senior ranks, there appears to be growing frustration among analysts and investors that the company has yet to determine its strategic focus. Zafirovski has talked about how Nortel wants to become a strong alternative to Cisco in the enterprise market.
At the same time, the company has been enthusiastic about the emerging Wi-Max and IP-TV markets, as well as pushing the concept of hyper-connectivity amid the explosion of network connections and bandwidth demands.
Meanwhile, a variety of Nortel executives has talked about how Nortel wants to make a major acquisition. The company apparently made a bid for Avaya Inc. but lost out to private equity investors. The latest speculation suggests Nortel could be interested in Foundry Networks Inc., F5 Networks Inc. and Polycom Inc. (ex-Nortel CEO Bill Owens is a Polycom director).
Nortel was apparently interested in 3Com Corp. but backed away from the deal due to concerns about competing with Huawei Technologies, which has a successful joint venture in China with 3Com. 3Com was acquired last week by Bain Capital for $2.2-billion – with Huawei taking a minority stake.
Analysts, meanwhile, are taking a dim view of Nortel’s financial performance. RBC Dominion Securities’ Mark Sue reduced his stock price target to $22 from $28 earlier this year, while maintaining his “sector perform” ratings.
Last week, Sue cut Nortel’s target again, this time to $18.
“The company has yet to display meaningful reversals in market share loss in its numerous key segments,” he wrote in a research report. “And with questions persisting on the company’s key product and strategy differentiation, the stock’s multiple may remain in check for some time.”
Sue said even if Nortel’s third and fourth-quarter sales meet expectations, “larger issues related to competition, a bloated cost structure, and a weak balance sheet remain” as major corporate challenges.
Nortel shares have floundered this year, hitting a four-year low of $16.10 in New York last month. Shares closed October 12 at $16.84, up 39 cents.
(Editor’s note: Mark Evans is a technology reporter based in Canada. He writes a blog about Nortel.)