Analysts: Nortel Likely to Shed More Divisions

With its chief financial officer set to take over the helm, look for Nortel Networks to focus on cutting costs and selling its divisions, say industry analysts.

With its chief financial officer set to take over the helm, look for Nortel Networks to focus on cutting costs and selling its divisions, say industry analysts.

"It says something about where their focus is," Deb Mielke, principal analyst at Treillage Network Strategies, said of Nortels announcement that President and Chief Executive Officer designate Frank Dunn, 47, will take over from retiring CEO and celebrated visionary John Roth on Nov. 1. "Nortels parts are worth more than their sum. Dunn might be getting ready to split up the company, sell off the parts."

Nortel gambled big on optics, won big in 1999 and 2000, but then got hammered when carriers stopped spending on long-haul optical transport, said Bill Lesieur, director of Technology Business Research. "Nortel would have been much better off if it had fostered its enterprise business" to build revenues and buffer it against the drop off in demand for long-haul optics.

Exuberance in the face of a spending downturn upended Nortel and other equipment makers. During the bull market of 1998 and 1999, "it was almost impossible to distinguish between good managers and bad managers," said Alan Tumolillo, chief operating officer at Probe Research, a market research firm. Everybody got rewarded for the most brilliant and the most idiotic business plans, and all pointed to the surging stock market as their validation.

"Roth and some of the others were blinded by Wall Street, thinking that what they were doing was absolutely correct," Tumolillo said. "They made a big bet on going heavily into the optical arena, but werent prepared for the inevitable slowdown. They didnt look at the downside, or if they did, they effectively ignored it."

Nortel last week announced 20,000 more layoffs, which will pare it down to 45,000 employees, about half of what it had a year ago.

Now Dunn plunges into restructuring the company.

"Whenever a CFO takes over a troubled company, the focus drifts away from research and development and toward stringent spending controls," Tumolillo said.

Trimming costs and raising cash -- at whatever the cost -- is already happening. Last week, Amdocs of St. Louis announced plans to buy Clarify, Nortels customer relationship management software division, for about $200 million -- a tenth of what Nortel paid for it two years ago.

While Nortel is still selling some legacy circuit switches, the spin-off of its CRM division leaves optical technology as its crown jewel. According to Aberdeen Group, Nortel is third in overall Intelligent Optical Networking sales with 12 percent market share, behind Cienas 25 percent and Lucents 14 percent, and just ahead of NEC, Cisco and Alcatel.

In the past year, younger competitors have deployed platforms that allow carriers to migrate at their own pace from older networks to newer Internet Protocol and gigabit Ethernet networks. But Nortel leapfrogged that hybrid strategy with products that force carriers to rebuild their networks.

If Dunn spins off the right divisions, raising cash and leaving Nortel with the products that customers want, its slimmer new self could get more aggressive about launching new lines, Mielke said.