Kicking management and practices at Nortel Networks Corp. (NYSE: NT) is nothing new for us.  We have discussed the company’s problems here for longer than memory serves.  Mike Zafirovski is president and chief executive officer of Nortel Networks and has been at the company since November of 2005. He replaced Bill Owens as CEO, who didn’t exactly have the longest tenure on the job.  So this is only a three-year tenure, but it has been a disastrous one.  As of today (and admittedly for quite for some time), Zafirovski is being named as one of our ten CEO’s that need to go in 2009.

Again, we do not merely call for CEO to get in thebread lines merely because of the stock price.  In this case, that would be easilyjustified.  With shares down around $0.50, thiswas a $17.00 stock a year ago and was trading at roughly $30.00 on anadjusted basis when he took over.  But again, there are many issues here beyond share prices. 

Nortel has been losing market share in many areas, in arestructuring mode that is still ongoing,and conducting lay-off after lay-off. It is now entering the crummy partof the business cycle highlighted by declining capex spending. Thecompany has also been trying to divest assets, but that is a very tough strategy to undertakeright now given the economy.

This CEO was brought in to turn this ship around, yet all that has happened is that when it started turning the ship to the port side it never stopped turning into any real direction. If the company did poorly when the segment was growing, itis very difficult to believe that Zafirovski as CEO will be the man toadequately lead during the coming storm.  This CEO is making the new tongue-in-cheek name "No-Tel" more and more accurate each day.

The company already conducted a 1:10 reverse split just two years ago.Reverse splits rarely work well for holders.  Unless a major doublingrally occurs, this week will make it almost 20 consecutive trading daysof Nortel’s stock trading under $1.00.  That means that the Christmaspresent from NYSE will be a card in the mail with the potentialde-listing notification pending a hearing and plan for remedy.Zafirovski may again have to consider a reverse split, and frankly itis difficult to find a precedent here to compare in modern historywhere a viable company has been in  this same spot.

Nortel’s restructuring and turnaround plans under  Zafirovskihave so far been disastrous, and at this point the question has come upover and over about this company’s viability.  The only company with asbad of a restructuring and steady gearing down of business is Motorolaon its more than a decade of downsizing.  It almost comes at no shockthat Zafirovski served as President and COO at Motorola.

In 2007, President George W. Bush appointed Zafirovski to the NationalSecurity Telecommunications Advisory Committee.  This hasfailed to yield any substantial gains.  Some may argue about that pointof view, but the stock price and the revenue trends speak forthemselves.

It seems that unless the Canadians come up with a homegrown "Go LocalOnly" strategy in purchasing telecom equipment and services or atelecom version of a TARP fund, then there are going to be problems. 

Even in September Zafirovski was talking about taking two years ofconsistent progress and leveraging to make the necessary changes topreserve and strengthen its business.  These feel-good comments aremind-numbing when you consider the disaster seen here, and it makes youwonder if he is looking in the rear view mirror or out the windshield.When you consider the leveraging along with the businesscontraction it should make an investor’s blood boil.

Are we on the third round of layoffs since the start of 2007, or it thefourth?  It matters not.  A recent restructuring may ultimately savecash, but so far all efforts to get back to profits have been elusive.We wonder if the restructuring is even worth it.  Will selling the metroethernet business matter, if it can even be sold?  The latestrestructuring is also taking out some top positions, and we would arguethat THE TOP position should be one of these exits.  Selling businessunits and campuses right now is at a time when the only price that willbe offered is the lowest price in recent history, so Nortel just needsto buckle up and work within its existing framework.

A call from Zacks Investment Research this week called it a SELL andoutlined many of the leveraging problems, wider losses, decliningrevenues, and the current economic climate.  Over 2008 it looks likeonly about 2 real large brokerage firms have given Nortel an upgrade,and based on the performance those analysts are likely wishing theycould say "We meant Downgraded, not Upgraded!"

So what lies ahead?  Unless a rabbit is pulled from the hat, 2008 willmark the third year of declining revenues. Analysts expect 2009 to markthe fourth consecutive year of revenue decline.  Even giving marks fora management team in shrinking the top line to look for profitablebusiness is not possible.  The losses attributable to holders isnumbing, and Nortel is still expected to lose money in 2008 and 2009.  Thecompany has also seen a steady decline in real and tangible assets, andit looks like the losses ahead will make it fund operations rather thanpay down  debt and liabilities until times get better.  IF times canget better at Nortel.

So what can Nortel do?  Nortel needs a top sales-oriented CEO from oneof the few key competitors.  These executives will tend to havenon-compete clauses so it may even have to dip down into the pools ofexecutives from the sales side that have been out of the game for ayear or two.  That is a risk, and it is one we openly admit.  But thecurrent CEO and team are not working out now and seem unlikely to be ona path to make a successful turnaround.

We view the chance that Zafirovski is on a short leash as being veryhigh.  Nortel has dumped executives and workers from the top to bottom,and we see no reason that Zafirovski needs to stay.  It literally willbe of no shock if this comes sooner rather than later.  If he stays on,the lawyers in class action suit cases may gvet to ask over and over,"Could you repeat what your thoughts were again back at the time…."

There is a sad opinion here above and beyond Zafirovski as CEO.  Let’sjust say he gets dumped as CEO or even if they just take away thePresident title.  We are hard pressed to think that anyone would wantto take this role.  The upside is huge, but the next round of shrinkageand plundering could in theory make the successor the man who took overfrom the dead train conductor and still drove off the edge of theabyss.

Zafirovski was one of the runner-up candidates for last year’s list of CEO’s to go for 2008.  There are hardly any on that list still running their companies and he was not two full years into the job as of yet.  We should have added him then, and the time has come.  Enough is enough.

Jon C. Ogg
December 4, 2008

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