Nortel Cuts Jobs, Fires Execs

Hobbled by an accounting debacle and sector slump, the network giant overhauls its organization and strategy.

Stung by an accounting debacle and sector slump, Nortel will lay off 3,500 employees, or 10 percent of its workforce, as part of a sweeping restructuring to put the company back on track.

The telecom equipment maker will put greater emphasis on providing gear for large corporations and government agencies that are moving to converged networks to carry voice, data and video content.

It's also bullish on China and India, where wireless carriers are investing billions of dollars in third-generation networks. From a technology standpoint, Nortel will make network security and reliability its priority.

The company acknowledged that it's facing growing pricing pressure from network equipment makers in China, one of the factors that prompted the cost cuts.

The job cuts announced today will occur by year's end and cost the company between $300 million and $400 million in severance pay and other charges. Ultimately, the move should save Nortel $450 million to $500 million in salary and benefit costs.

Nortel executives stressed that improving its $3.6 billion cash reserve is a key objective of the restructuring. They don't believe the deep cuts will hamper growth.

The reductions are on top of 2,500 workers who will transfer to Flextronics as part of a recent outsourced manufacturing contract.

"We understand this business well," CEO Bill Owens said during a teleconference with analysts and reporters, noting that at one point Nortel had 100,000 workers.

Nortel will not cut all of the departments. The company will establish two new executive posts: a chief strategy officer, to drive partnerships, assess new markets and acquisitions; and a chief marketing officer to take a long-range view of the company's image.

In further fallout from the accounting scandal, the company fired seven executives who had financial reporting responsibilities. Previously, the company dismissed its former president and CEO, CFO and controller over the issue.

Not only did the company boot the 10 executives for cause, but it's going after about $10 million in bonuses they received at the end of 2003.

"We are striving to make ourselves the most credible, honest and efficient company in our marketplace," Owens said.

The personnel moves come after the Royal Canadian Mounted Police launched a criminal investigation into the matter. Meanwhile, the U.S. Attorney's Office launched its own probe amid a slew of shareholder lawsuits that are also pending.

New safeguards, being drafted with the help of outside consultants, will make Nortel "best-in-class" in terms of complying with federal regulations, such as Sarbanes-Oxley, Owens said.

Finally, Nortel released estimated un-audited results for the first six months of the year. Revenues were approximately $5.1 billion (about evenly split between the first and second quarters).

Net earnings range between break-even and 2 cents per share. Nortel hopes to present more concrete numbers for the first half of the year by the end of the third quarter.

The company expects the market to grow in the low to mid-single digits in 2004 compared to 2003, and that its revenues will grow faster than the market.

Owens concluded by saying the restructuring will help Nortel turn its "technological advantage into business results."

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