He thought the stock was going even higher so he didn’t sell right away. As it tumbled, he kept waiting for a rebound that never came.

Now Nortel is bankrupt and the shares are no longer listed in Canada. And to pour salt into the wound, Mr. Roy (not his real name) is now faced with paying taxes on the benefit he received when he exercised his options. He is losing sleep over the possibility he may have to cash in his RRSP or sell/re-mortgage his home.

Under Canadian tax law, the benefit of $250,000 is deemed to be  income received from his employer. He is is taxed on half of it whenever the shares are disposed (at his marginal income tax rate when the options were exercised).

If a company disappears through merger, break-up etc., the shareholders are considered to have disposed of their shares. So Mr. Roy is now faced with a giant tax bill on his worthless shares (he cannot apply the capital loss to the benefit because it is considered employment income). 

He is not alone. Besides other Nortel employees, there are employees of other high tech firms that exercised options during the bubble era. As long as they don’t sell their shares, the tax bill is not triggered. But if they pass away or the shares are delisted due to merger, dissolution, etc., the tax bill is triggered.

A lobby group, called Canadians for Fair and Equitable Taxation (CFET), has been formed to campaign for a change to the law. So far, they have not been successful even though a precedent for relief was established in Canada for a group of JDS Uniphase shareholders and the U.S. government last year amended its tax laws to give relief from the imposition of huge tax bills on worthless shares.

• Canada’s global competitiveness and productivity, and the role technology plays in improving both, if only small and medium-sized enterprises more readily adopted information and communication technologies (ICT);
• the importance of research and development inside businesses;
• strategies for building next-generation broadband networks across the country;
• notions of net neutrality and open, transparent networks;
• a drive to digitize all health records;
• the role legislation to protect consumers online plays in providing them with the confidence to adopt new technologies;
• and even a call to digitize all of Canada’s archived historical materials and make them accessible to the public.

It was a lot to take in, with the room full of high-powered business people, lawyers and academics, each with their self-interested view to propose. In his closing remarks, Minister Clement acknowledged he had a lot to synthesize.

But the underlying message of the proceedings, which were held under the high, arching ceiling of the Government Conference Centre’s main hall, was clear: the whole of the Canadian economy needs a thriving ICT sector, and the government needs to move quickly in adopting policies, legislation and spending plans that will position the country at the forefront of the continuing technology revolution driven by networks, the Internet, and digital content.

The timing was coincidental, but the symbolism was hard to miss. Just 60 hours before the conference opened, Nortel Networks officially announced what many suspected would be its fate ever since it sought bankruptcy protection in January: the once-grand communications equipment maker now planned to sell itself off in pieces—and likely for a sum about US$1.5 billion short of its US$3.6 billion in liabilities—and would also request that the Toronto Stock Exchange de-list its shares, likely putting its long-suffering investors out of their misery once and for all.

At the beginning of this decade, Nortel was Canada’s eminent technology flagship company, but now it is in tatters. Its stock last traded on Friday, closing at  at 18.5¢. On July 26, 2000, 2,239 trading days earlier, Nortel shares traded as high as $1245 (once adjusted for a 2006 1-for-10 stock consolidation), which gave it a market capitalization of about $385 billion, or about 36.5% of the total TSE 300 Index.

Briefly, a look back at the story in the National Post’s Financial Post Investing section the next morning (pay close attention to the last three paragraphs):

Analysts rush to ratchet up Nortel share targets: 50% upside seen

National Post
Thu Jul 27 2000
Page: D1 / FRONT
Section: Financial Post Investing
Byline: Michael Lewis

Better than expected second-quarter results fuelled a rise in Nortel Networks Corp.’s shares yesterday, and had analysts scrambling to upgrade their outlook for Canada’s most valuable company. After Nortel posted a large jump in per-share operating earnings, besting analysts’ consensus forecast by more than 25%, its shares (NT/TSE) rose $2.35 to $123.10. The stock is ahead by more than 68% this year and 286% over the past 12 months. In New York the stock (NT/NYSE) closed at US$87 3/8.

On Tuesday Nortel upped its revenue growth forecast for 2000 and 2001 to more than 40% from a previous maximum of 35%, and a number of analysts followed suit.

…Nortel said on Tuesday its EPS from operations will grow in the high 30% range and forecast 2001 growth of up to 35% in revenues and earnings per share.

Analysts are bullish on Nortel as a result of its growth prospects, largely based on intense global demand for its fibre-optic products.

And they are willing to look past the fact that Nortel’s accounting methods disguise underlying net losses, once the cost of acquisitions are included.

A string of multibillion-dollar acquisitions added $1-billion in costs in its latest quarter alone and contributed largely to the firm’s losses, after extraordinary items, of more than US$1.63-billion in the past two full reporting years.

“No company ever went under because of accounting methods,” said Tim Burke, a telecommunications analyst with Edward Jones in St Louis. “The important thing is to look at cash and growth, and Nortel has both.” (Source: FPInfomart.ca)

It’s breathtaking to reflect on the arrogance of that era, and all that has unraveled since.

But I digress. Although the news of Nortel’s liquidation was barely mentioned during the conference—the role of Twitter in the Iran’s election demonstrations was brought up more often—it nevertheless was an appropriate backdrop to a conference about Canada’s and its businesses’ roles in the global digital economy. Some of the attendees, like Sir Terence Matthews, have taken part in previous forums, task forces, strategic councils, and authored countless papers on the future of technology in Canada. Remember the National Broadband Task Force? That was 2001, in the days when Brian “Captain Canada” Tobin was the federal Liberal Industry Minister, although the process was started by his predecessor, John Manley (who is on Nortel’s board of directors).

Eight years on, Canadians use the Internet and digital media much differently, while their understanding of the complex issues underlying them has grown more nuanced. Debates surrounding issues like net neutrality (or network management), intellectual property rights, digital rights management and online privacy in age of social networking have come a long way.

I will likely write more about the conference (you can watch the archived webcast here) and the emerging digital strategy, either in further blog posts or in the upcoming issue. But here’s one final thought: it was remarkable how prominent luminaries from the Waterloo, Ont. region were present. RIM co-CEO Mike Lazaridis helped open the conference, while University of Waterloo president David Johnston played a key role, as did Open Text executive chairman and chief strategy officer Tom Jenkins (whom I profiled in the most recent issue). In fact, Jenkins’ initiatives of the University of Waterloo Stratford Institute, the Canadian Digital Media Network, and the Canada 3.0 Forum on June 8 and 9, clearly helped shape this federal conference, and were mentioned multiple times by Minister Clement and others.

But representatives from Ottawa’s technology companies were not there in force—only Kirk Mandy, CEO of Zarlink Semiconductor made a comment from the floor. And, of course, not a soul from Nortel was present.

Where will Canadian tech companies be in 2019? One hopes neither on the verge of vanishing, like Nortel is now, or still sitting in conferences, talking about how the government needs to form some kind of strategy for its ICT industry.

Further reading on Nortel:

“Plan Z,” Canadian Business magazine, January 27, 2009

“The Good, The Bad and The Ugly: Nortel Networks,” Canadian Business magazine, March 30, 2009

I found out this morning—after the story went to press on Friday—that those numbers are close, but not absolutely accurate. In fact, employment in Canada is lower.

From an overdue e-mail from Nortel spokesperson Mohammed Nakhooda this morning:

“…these are the latest numbers I have for you…
5639 (Canada)
3844 (Ottawa)
8882 (US)

14521 (North America) – total

Presence in Toronto (HQ); Belleville, Calgary, Edmonton, Halifax, Montreal, Ottawa, Regina, Vancouver and Winnipeg.”

I’m assuming that the “presence” in places like Edmonton, Halifax, Regina, Vancouver and Winnipeg are minimally staffed sales-support offices.

Also, those numbers will decline. The full effect of the 5000 layoffs announced in recent weeks is still rolling through the company.

(By the way, I have a story about what comes next for Nortel in the current issue of Canadian Business, which begins to hit newsstands today.)

But let’s focus for now on the management variable. In the past, hiring an accomplished executive from the top ranks of Corporate America usually worked when there was a crisis to overcome. In the 1970s, it was John Lobb — the Mr. Fix-it from ITT Corp. In the early 1990s, it was Paul Stern from Unisys Corp. Both were highly capable and demanding executives who were in line to become CEOs of their firms but were bypassed. A psychologist might argue they were out to prove their doubters wrong by accepting the CEO job at Nortel (besides make a mint on stock options).

Mike Zafirovski fit the same mold, a capable senior executive overlooked for the CEO position at Motorola. The stage looked set for a repeat of the magic formula. So what went wrong?

Both Lobb and Stern had a sense of urgency that drove them to make big changes fast — even though radical change can scare people and risk rebellion. Indeed, in his departure speech, Stern said the reason for his image as a “tyrant” was due to his refusal to slow the pace of change. He defended his bold moves with the frog-in the-boiling-pot metaphor (as quoted from Nortel Networks: How Innovation and Vision Created a Network Giant)

“If you turn up the heat slowly, the frog will get comfortable in the warm water and he will die when it starts to boil. But if the water is boiling and you toss in the frog, he’ll jump right back out. I believe in dramatic change. It keeps you alert, alive. Incremental change doesn’t succeed; the bureaucracy kills slow change. You’ve got to make the bold move.”

It could be argued that the collapse of the world banking system and consequent severe recession was what tripped Mr. Zafirovski up. But if he had been imbued with a sense of urgency similar to his predecessors, maybe Nortel’s turnaround would have been completed before 2008 and Nortel could have avoided bankruptcy protection and the likely dismemberment to come.

Then again, to be fair, Mr. Z. was operating without the safety net of BCE Inc. Over the 1970s to 1990s, BCE was a source of capital, revenues, and manpower for Nortel. But by 2000, the year BCE disposed of its stake in Nortel, it had become too big to be backstopped. Indeed, BCE more or less lost that ability when it lost its status as a regulated monopoly in local telephone service, depriving it of a guaranteed source of cash flow. We could probably go on with more perspectives, but let’s leave it at that for now.

The board of directors met last night, looked at all the options, and swallowed hard. Rather make a $107-million interest payment on its debt, the company will restructure.

Will this be the final chapter of the Great Calamity, or the move that as CEO Mike Zafirovski puts Nortel (TSX: NT) “on a sound financial footing once and for all.” In an effort to prop up what remains of Nortel’s business, Zafirovski writes in a letter posted to the website, “Nortel is still very much in business and our commitment to customers remains unwavering. We will continue to invest in leading edge R&D to deliver the value our customers expect from us.”

Will customers, sales prospects and suppliers buy it? Will employees? Or will this only confirm the sentiment that Nortel is not a viable businesss, and accelerate its decline?

“I am confident that the actions we’re announcing today will be the fastest, most effective means to translate our improved operational efficiency, double-digit productivity, focused R&D and technology leadership into long-term success,” Zafirovski said in the statement. “I want to reaffirm Nortel’s dedication to delivering world-class solutions and services to customers.”

Just what solutions and services will continue under the Nortel banner—or if, in fact, the Nortel banner disappears completely—is a matter of speculation. Its Metro Ethernet Networking division has been on the block for months as the economy further deteriorated, but nothing has come to pass. (One of the rumoured bidders, China’s Huawei, comes with a host of national security concerns for U.S. and Canada.) Perhaps this will move things forward.

Trading in Nortel shares have been halted and the TSX and New York Stock Exchanges are likely to delist the stock. For investors, those who were still clinging, this is the end.

But Ogg concludes that Zafirovski has to be shown the door, and puts him on a watch list of 10 CEOs to go in 2009.

I’m not so sure, for a very simple reason: at this point, no one is going to do a better job. None of the very critical problems that Nortel faces gets solved by Zafirovski getting the boot. The company has lurched from crisis to crisis, and many of them over the years were rooted in failures of leadership of one kind or another. Not one of Mike Z.’s three predecessors, John Roth, Frank Dunn, and Bill Owens, deserve passing grades from shareholders. The last thing Nortel needs right now is to try and switch leaders again.

Besides, as Ogg himself notes:

Nortel needs a top sales-oriented CEO from one of the few key competitors.  These executives will tend to have non-compete clauses so it may even have to dip down into the pools of executives from the sales side that have been out of the game for a year or two.  That is a risk, and it is one we openly admit….

…Let’s just say he gets dumped as CEO or even if they just take away the President title.  We are hard pressed to think that anyone would want to take this role.  The upside is huge, but the next round of shrinkage and plundering could in theory make the successor the man who took over from the dead train conductor and still drove off the edge of the abyss.

Right. Nortel doesn’t have the luxury of time to undertake a high-level executive search for a CEO who would then potentially want to hire a new management team. And the board probably couldn’t find a good candidate, anyway.

No, this all rests on Zafirovski’s shoulders. Either he gets the credit for some modern-day miracle of business turnarounds, or he gets the ignominy of being on duty for the iconic Canadian company’s breakup, bankruptcy, sale, or some combination thereof. And, by the way, his compensation ought to closely reflect those outcomes.

Yes, 2009 will be a defining year for Nortel and Zafirovski. But their fates are inextricably linked. Showing him the door, probably with a big payout, would only let him off the hook.

The market rallied just over 5% that day, so the tech “dinosaur” beat the market close to seven times. Some of Nortel’s leap might have been due to a contract win with Verizon Business announced Nov. 13, but the dramatic uptick likely was mostly due to market conditions and should provide some idea of the potential for gains once markets rally off their bottoms. If we get just a modest 15% rebound across the board within the next few months, Nortel could be 30% to 100% higher.

The most oversold stocks tend to lead the climb off the bottom, according to technical analysts. Nortel certainly fits the description of heavily oversold. So maybe there could be, despite the thick-as-molasses pessimism, some dramatic upside for Nortel shares over the next few months?

Nortel may or may not go to zero eventually, as some prophesize. In the meantime, though, traders, with nerves of steel might be well rewarded. Once again a caveat: as you may recall from this post, I am a long-suffering holder of Nortel shares.

You can see it here, on YouTube, posted by “nortelvids” and aptly described as: “This fully animated piece follows a lonely robot as he finds an energy efficient Nortel oasis in a dark and dreary future world.”

A couple of things spring to mind. First off: Way to go Nortel for not exactly blowing the advertising budget! Considering the financial pressures they have (this morning, Lehman Brothers joined a conga-line of other analyst downgrades and slashed its price target to US$6 from US$15.50, citing “several possible headwinds,” and in particular, the carrier networks division’s grim outlook for revenue growth), the idea of a crudely drawn cartoon with eerie background music posted to YouTube does seem more prudent than, say, a lavish network television ad blitz.

Mind you, the cartoon doesn’t exactly inspire confidence in Nortel’s professionalism, and the premise that Nortel will be the remaining bastion of technological hope is pretty funny. It’s almost too easy to mock. Have at it nonetheless.

Now, in case you think I spend time searching on YouTube for videos about Nortel, I don’t. Instead, I heard about it through Twitter: I follow the company’s Twitter profile, run by Texas-based employee Bo Gowan. He also manages the Nortel Buzzboard blog, where he explains in a post today that the “Robot” spot is the first of a series of videos he will be posting that were homemade by Nortel employees on their own time to “highlight Nortel’s green and energy efficiency benefits.” He’ll be posting more this week. And then….

Then the fun starts — next Tuesday I’ll post two brand new Nortel commercials (professional ones), bringing the video tally to five, and you’ll get to vote for your favorite video among all of them.  Will the masses like the slick, professionally-created ads, or the YouTube-style spot that a random Nortel employee created at home on her Mac?  That’s for you to decide.

And here’s the really cool part.  Whichever video wins the vote will be used as an actual online ad as part of Nortel’s online advertising campaign!  So as they say, “your vote counts!”

Oh goody.

Admittedly, this is completely irrelevant to all the many serious business challenges Nortel faces right now. (It recently made Motley Fool’s list of Deathbed stocks.) But it’s interesting to watch how the company is attempting to leverage (low-cost) social networking tools to promote the company. Several high-ranking executives, including Chief Technology Officer John Roese, have blogs, which come across as being pretty authentic and not just ghost written by public relations people. (Mark Evans, a Toronto-based blogger and social media expert who used to cover Nortel as a reporter at the Financial Post, continues to tracks the company at All About Nortel and seems to like its efforts. See other posts here, and here.)

But homemade videos as the source for an online ad campaign? Maybe those employees could better spend their personal time looking for alternative job prospects.

There is little on the site to confirm it actually belongs to him but rcarrick is from Canada and he (or she) joined Covestor.com in late October, a few days before Rob Carrick’s column on Covestor.com and other social-investing websites appeared in the Globe. Perhaps while visiting Covestor.com as part of his research, Rob decided to link his brokerage account? Portfolio highlights:

- nine holdings with a tilt toward income investments
- all down, with Nortel Networks the most
- loss since inception is -13% (would be smaller if dividend income included)
- purchases in last 2 months were Fortis, RioCan Trust, and Yellow Pages Trust.

Rcarrick’s portfolio:
TransCanada Corp.
Manulife Financial Corp.
Mainstreet Equity Corp.
Fortis Inc.
RioCan Real Estate Investment Trust
Cameco Corp.
Yellow Pages Income Fund
Peyto Energy Trust
Nortel Networks

Perhaps the sell-off is related to recession fears. But telecom spending has been picking up due to a surge in bandwidth-intensive video transmission, and is forecast to grow strongly. Cisco Systems, for example, projects 50% annual Internet traffic growth. If the recession is not too severe, perhaps telecom spending can still continue to rise.

Nortel is showing some promise in the 40-gigabit optical transport line, with over a dozen contract wins during two months of general availability in its new line-up. And JPMorgan analyst Ehud Gelblum upgraded Nortel stock in early June to a buy (following a four-year neutral rating) thanks in part to a key contract win with Verizon Communications (NYSE: VZ) for Metro Ethernet switching equipment.

Analysts have said Nortel is making progress on cutting costs and jettisoning disappointing businesses (a la the General Electric (NYSE: GE) culture from which CEO Mike Zafirovski hails). Still, the wireless division, which is carrying the other business lines, faces a projected 4% annual decline in the CDMA wireless market.

Nortel is preparing for the wireless future by putting its WiMax initiative into a partnership with Alvarion and concentrating R&D on the LTE (long-term evolution) standard — which analysts have applauded because some of the largest phone companies are leaning toward LTE. Nortel also says it is the only company in the industry conducting live trials of LTE; however, it also faces more competition in this new arena.

So where is the stock going? Despite recent price action, there seems to be an improvement in expert opinion and fundamentals. Still, the situation remains speculative. And add a grain of salt to my update – I'm a long-suffering Nortel investor whose holdings are down 70%.

Sadly, he was the only scientist in the group of 75 honoured on July 1. The rest were a pastiche of politicians, musicians, union leaders, actors, dentists, activists, and so on. Maybe when Canada begins valuing its scientists more, we'll have more of the kind of innovation that leads to greater national wealth.

The time period is more defined than the SEC’s civil suit, which in addition to that 18-month span, also targets events in late 2000, and the second-half of 2003. Also, the IMET charges don’t include MaryAnne Pahapill, Nortel’s Assistant Controller and Vice-President of Reporting of that period, nor the four Nortel divisional vice-presidents of finance that the SEC charged late last summer (three of whom reached settlements of US$75,000 each and five-year bans on acting as a director or officer of a public company). Save for Pahapill, all the executives were fired for cause in 2004.

What’s the upshot of this? For Nortel, it looks like it has dodged any further legal slings and arrows, for now. It issued a statement today clarifying that it was not the target of the investigation, and that it cooperated with the RCMP. To date, it has paid: US$2.4 billion to settle class-action lawsuits; US$35 million in October to settle with the SEC over allegations of profit manipulation; and a measly $1 million last year to the Ontario Securities Commission just to cover investigation costs. But the office of the U.S. Attorney for the North District of Texas, which also contributed to the RCMP probe, is continuing its own criminal investigation, so maybe it’s not out of the woods yet.

But this is a good day for the RCMP’s fraud cops, simply for the optics of filing charges ahead of U.S. investigators (if they do at all). This case will be closely watched for IMET’s ability to bag big game, though. Canada is often regarded as having toothless market regulation—the OSC seems particularly inept—and it doesn’t get much more high-profile than former Nortel executives, and a lot is riding on these charges sticking. (The court granted defense lawyers’ requests for a publication ban on the evidence.) Investors should at least feel some vindication that these are, in fact, criminal fraud charges—even if they really wish it was Dunn’s predecessor, John Roth, who was on trial for putting Nortel in its precarious position in the first place, eight long years ago.

Regardless, it’s a disgrace that such white-collar crime cases take so long to land in court at all. The wheels of justice certainly turn too slowly for the investors, and also the alleged perpetrators, who’ve had this investigation hanging over them for years now.

For the record, Dunn contends the accounting issues at the heart of these lawsuits were errors, not fraud. A statement from his lawyer read, “the evidence will demonstrate that Mr. Dunn acted honestly and diligently in the interests of Nortel’s shareholders and employees at all times, and that he will be acquitted of these charges.” Beatty and Gollogly also deny the allegations. Nortel is suing its three former executives to recover $12.85-million in bonuses; Beatty and Gollogly are suing Nortel for wrongful dismissal. All three face OSC hearings for alleged improper accounting practices. Lawyers are getting rich all over the place.

The former Nortel executives’ next court appearance for the criminal fraud charges is Aug. 18, in Newmarket, Ont., north of Toronto.

One final note: the National Post reported back in February that charges were “imminent”. Perhaps it is only a happy coincidence for Nortel that the positive vibes it set off last week with an upbeat analyst day had a few days to dissipate before this news surfaced. On the TSX, Nortel shares were off 3% today, a continuation of Wednesday’s 4% slide.

But something else we changed is the criteria for what even makes the list. We revisited the question, Just what is “Canadian tech”? Research In Motion and Nortel Networks obviously make the list, but Canada does not have a huge pool of traditional computer manufacturers, for instance, or even many big software developers. Standard industry classifications, like those used by our data provider, Bloomberg, are not always completely accurate or up-to-date, and relying on them wouldn’t provide an accurate snapshot of technology companies in Canada — it would be easy to cast too wide a net and rank non-tech companies, or conversely, miss firms worthy of inclusion. For example, in the aerospace sector, MacDonald, Dettwiler & Associates is a very high-tech company, but it’s shifting much of its business into information services. It needs to be on any Canadian tech list, but its traditional industry peers in aerospace are in many cases more like contract manufacturers than real R&D shops. Using R&D as a litmus test has shortcomings, too: the formerly Canadian Inco (now a subsidiary of Companhia Vale do Rio Doce), conducts a lot of high-tech R&D to improve its mining operations, as do oil & gas producers, but you wouldn’t want them on a list of tech companies. What about telecom and cable companies? They seem high-tech — they sell Internet connectivity, for starters — but they mostly buy technology from other sources, and several of them are starting to have more in common with broadcasting companies.

So what is tech enough to make a list of tech companies?

In the end, we decided that the list ought to focus on those companies with business models that depend on in-house advanced technological knowledge and ingenuity to create a unique value proposition for its end market — that is ultimately what investors seek when they buy shares in high-tech. And in addition to that broad definition, we specifically focus on companies that conduct meaningful advanced technology R&D for their own products or services, develop advanced hardware or software for end markets, provide advanced IT services (like CGI) or manufactures advanced IT products (such as Celestica). Clean tech is most definitely in, while the communications sector is out — and biotech, well, that’s just a whole other world.

I think our list is pretty representative of the choices investors have in the Canadian technology universe — as small as it is. But I would be interested in your thoughts. And if you think we’ve missed a company that needs to be included, be sure to let us know. As the technology landscape continues to change, and the worlds of communications, IT, services, and entertainment products converge, this game of defining the edges of Canadian “tech” will only get more tricky.

Since joining in 2005, CEO Mike Zafirovski and his hand-picked team have largely cleaned up the messes left behind by predecessor regimes under CEOs John Roth, Frank Dunn, and Bill Owens. So Nortel is no longer dysfunctional and imploding—hooray! But there are lots of questions about the competitive strength of its diverse product portfolio for growth, and how it intends to become more profitable. (As of Tuesday’s close, its stock was off 74% since Zafirovski joined November 15, 2005, and down 46% year-to-date. Makes for an ugly chart). Today was focused on clarifying those matters.

Off the top, Nortel had two pieces of real news. The first was that it reaffirmed its outlook for 2008: Revenue will grow in the “low single digits” from US$10.95 billion in 2007, when they were up 2%; gross margin is on roughly on target for 43% of revenue (2007 was 42.1%); and operating margin, as a percentage of revenue, will increase 300 basis points to about 6.7% from 3.7% of revenue in 2007, and halfway to Zafirovski’s stated target of about 13%. So financially, things seem to be generally improving, albeit slowly.

The second news is more intriguing: it’s partnering with Alvarion, an Israeli company that is a leader in WiMax wireless broadband equipment, in a joint venture for both product development and sales. Investors certainly responded positively: the stock shot up more than 13% today, as of 3:30 p.m.).

As Nortel’s president of Carrier Networks division Richard Lowe explained during the conference, the deal will allow him to “meter my investment in WiMax,” and shift resources toward “the nascent technology” known as Long Term Evolution. More commonly referred to as LTE, the fourth-generation mobile wireless technology actually competes in some ways with WiMax, but Nortel sees the market emerging faster than anticipated: only a US$400-million market in 2010, according to Lowe, but quickly turning into US$1.6 billion in 2011, and a US$10 billion in 2015. As a couple of analysts from the conference floor pointed out, Nortel needs to convert its 30% market share in the second-generation (and in some ways second-rate) CDMA wireless standard into LTE customers, which is no given, and 2015 is a long time to wait for results.

Of course, it wasn’t that long ago that WiMax was touted as one of Nortel’s keys to growth. This deal suggests Nortel didn’t have all the pieces to really compete. As Zafirovski said, “WiMax…did not provide the revenues at the level we were expecting.”

Partnerships have become a big theme at Nortel. Chief strategist George Riedel noted that Nortel is not going to be successful in all of its many markets (some would say too many) by just going it alone, and certainly not profitably. Lowe claimed Nortel’s joint venture with LG Electronics of South Korea is performing well, and Joel Hackney, president of the Enterprise division talked up 800-plus customer wins from its Unified Communications partnership with Microsoft, and likewise some of its relationships with IBM and Dell. But so far, the partnerships have had minimal impact to the top and bottom lines.

Nortel is still selling mostly to telecom carriers, with more than half of its revenue (if you include related services) coming from its Carrier division, and a big chunk of that is based on CDMA, a second-generation wireless standard that is on the wane (some think it might tip off a cliff). Zafirovski is pinning Nortel’s growth on Enterprise and Metro Ethernet Networks divisions—12% and 10% compound annualized growth rates between 2007 and 2011—and operating margin projections are also aggressive. These two areas will have to make up for declining revenue in wireless, and shrinking operating margins in the Carrier division overall.

Watching how Nortel manages that transition will be fascinating. The company’s trying to ride out many swift changes in the communications marketplace, by becoming less of a pure telecom equipment business, and compete more directly with the likes of Cisco Systems (it has a new marketing push on how much more efficient its gear is, for instance). That means shifting its product portfolio into growth areas, and completely reinventing its corporate persona, while building on some of its old strengths in telecom. Riedel’s presentation pegged the telecom market at about US$300 billion, and the IT market at US$860 billion; converge the two and you have a market opportunity of more than a trillion dollars. Whether Nortel can position itself correctly in that market is what investors are waiting to see.

(This first appeared as a column on June 11: http://www.canadianbusiness.com/columnists/andrew_wahl/article.jsp?content=20080611_171027_3120)