A Brief History of Nortel Networks

| About: Nortel Networks (NT)
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As Nortel Networks (NT) teeters on the edge, we might prepare to say our goodbyes by looking back on the company’s 113 years of existence. Or the more optimistic among us might want to see if there are any clues in the company’s past that indicate if and/or how it might be able to continue on (as a supplementary to this article). The short history that follows is mostly condensed from a book I wrote on Nortel several years ago.

Nortel Networks was created in 1895 when Montreal-based Bell Canada divested its manufacturing division under the name Northern Electric and Manufacturing Co. The purpose of the reorganization was to circumvent government restrictions prohibiting diversification of its manufacturing operations.

For the first 60 years of its existence, controlling equity stakes were owned by Bell Canada and Western Electric, the manufacturing arm of AT&T Corp. As a preferred supplier to Bell Canada, Nortel’s core business was manufacturing telephone equipment according to designs licensed from Western Electric – which, in turn, received a royalty on Nortel’s sales.

Nortel took full advantage of the freedom to diversify its production. By 1900, it was the largest manufacturer in the world of sleigh bells. It also became the dominant supplier of electrical appliances in Canada (a business it left in the 1950s).

The boom in the 1920s caused employment at Nortel to soar from 2,500 to 7,000 persons. But the depression of the 1930s hit hard and employment was cut back drastically to 2,500. Nortel was saved from bankruptcy thanks to a loan from Western Electric.

In 1956, AT&T signed an antitrust agreement with the U.S. Justice Department that loosened Western Electric’s monopolistic influence in the manufacture of telephone equipment. This led to Western Union withdrawing from the Canadian market and the sale of its Nortel stake to Bell Canada in 1962.

Over the 1970s, Bell Canada funded research at Nortel into the development of digital switches. By the early 1980s, it was first to market with this new technology for switching calls on the telephone network.

The timing was perfect: the recent breakup of AT&T’s monopoly allowed the regional Bells to buy equipment from suppliers other than Western Electric. During the severe recession of the early 1980s, Nortel’s stock was one of the few to rise appreciably, as purchase orders flooded in from the regional Bell companies.

In the late 1980s, Nortel’s fiber-optics product line emerged from “skunk work” projects initiated by Rudolph Kriegler (who was awarded the Order of Canada in 2008). In the early 1990s, John Roth led Nortel’s foray into wireless communications.

The Internet emerged as a force in the 1990s and to adapt, Nortel took a “right-angle turn” – a centerpiece of which was an aggressive acquisition program carried out under John Roth. At the peak of Nortel’s fortunes in 1999, Mr. Kriegler told a journalist: “I never thought Nortel would do so well.” Bell Canada sold off most of its Nortel stake in 2000.

Shortly after, the tech bubble burst and Nortel’s shares collapsed with it. An accounting scandal dispelled early signs of recovery. A financial crisis in 2008 dimmed hopes for a turnaround under CEO Mike Zafirovski.

Future post: What does Nortel’s history say about its chances for survival and how more growth stories like Nortel (during the 1970s-1990s era) might be created?

Read the transcript of Nortel's recent Q308 conference call here.