Nortel Looks to Settle With Shareholders for $2.4 Billion

Nortel said it has reached an agreement in principle to pay US$2.4 billion to settle shareholder lawsuits stemming from accounting misstatements at the telecom gear maker, moving the beleaguered company one step closer to ending a dark chapter in its history.

The settlement would avoid at least one civil lawsuit by a class action of shareholders who say they were harmed by the Canadian company’s misleading financial disclosures starting in 2001 and its restatement of earlier results in 2003.

Tough Times

The same accounting issues have led to the firing of several top executives, restatement of several quarters’ worth of earnings and investigations from the U.S. Securities and Exchange Commission and Canadian stock regulators.

The proposed settlement would encompass all shareholder suits worldwide. Under it, Nortel would pay $575 million in cash, issue more than 600 million shares of its stock — nearly 15 percent of the total market capitalization — and share half of any money recovered in civil suits it is pursuing against fired executives.

Before it can be finalized, the deal will need to be signed off on by a range of shareholder groups. In addition to the payments, the agreement will likely include some requirements that Nortel adhere to certain corporate governance standards going forward. Nortel also said it was still in discussions with its insurers about the deal.

“Our intent is to achieve a fair resolution of these lawsuits and avoid a prolonged, uncertain and costly litigation process,” said Harry Pearce, Nortel’s chairman. “A final settlement would remove a significant impediment to Nortel’s future success and allow … the Nortel team to move forward.”

Nortel said the agreement would not contain any admission of wrong-doing by the company and cautioned that work remains to be done before it can be finalized.

Repairing the Damage

Such a settlement could be the last in a long series of changes at Nortel aimed at reviving its fortunes. One of those changes is the hiring of a new CEO, former Motorola executive Mike Zafirovsky.

“Resolving these important issues will enhance the company’s ability to focus on our transformation and renewal priorities and our customers,” Zafirovski said.

Nortel said while details were still being hammered out on the corporate governance terms of the agreement, it was comfortable being compared to the top-ranked publicly traded companies in terms of corporate governance as measured by Institutional Shareholder Services. “Sound and responsible corporate governance is integral to Nortel’s future,” Pearce said.

To pay for the settlement, Nortel said it would take a charge against 2005 results, with the stock portion of the deal worth an estimated $1.89 billion.

Long Road Back

Nortel still has work to do, but it is on the road to recovering some of the luster it once enjoyed in the telecom space, analyst Jeff Kagan told the E-Commerce Times.

“They are coming off a crazy period of correcting numbers, firing executives and hiring new ones,” he said. “They have had every right to be distracted over the past year.”

Still, Nortel’s earnings have not been as badly damaged as some had predicted, he added, suggesting the company continued to execute, at least on sales strategy, during the turmoil.

“Now it’s up to Zafirovski to take the ball and run with it,” Kagan said. “The future of the company depends on it.”

In addition to hiring Zafirovski — a move briefly the subject of a legal spat with Motorola since settled — Nortel recently made an acquisition that underscores its belief that it can be a player in the rapidly emerging market for converged services. Nortel paid just under $100 million to acquire Tasman Networks, a maker of high-performance enterprise routers in a deal that will help Nortel add more VoIP and other data services to its menu of offerings.

Nortel also said it would work with Cisco Systems and cable provider Comcast to develop a single platform for delivering TV-style video and other services with an eye toward breaking down barriers that, for instance, make it impossible to send television transmissions that can be carried over traditional cable TV and Web networks at the same time.

Nortel’s ability to transform itself may be somewhat hampered by such a large settlement and by the distractions of the accounting problems, which has given rival gear makers time to catch up to or surpass it technologically.

Many expect Nortel to become more of a mover and shaker under Zafirovsky, however.

“We expect a lot of fireworks out of Nortel in the first half of 2006,” CIBC World Markets analyst Steve Kamman said in a research note. “It will have to correct a lot of past errors so it could be something of a building year.”