"Sell Nortel? Absolutely Not"


Few people expected that Frank A. Dunn would run Nortel Networks. As late as the spring of 2001, the top job at the Canadian telecom-equipment maker seemed slated for Clarence Chandran, a smooth-talking Nortel veteran. Then disaster struck. Nortel suffered through three quarters of losses and declining revenues amid the worst telecom slump in decades. Then-CEO John Roth resigned, and Chandran retired due to complications from a stabbing years prior.

Desperate for an experienced Nortel exec to steer the company through turbulent economic times, the board of directors turned to Dunn, an accountant by training who had never run any of Nortel's businesses in his 26-year career there. "We thought that Frank was the guy with the right kind of skills for the job," says board Chairman Red Wilson.

Dunn is a passionate man who talks in rapid-fire phrases. He joined Nortel out of college and rose through a series of finance positions, making CFO in 1999. Sensitive but tough, he's admired by many -- and feared by some -- for his unwavering devotion to the company.

His financial acumen is being tested as Nortel faces a cash crunch. On June 3, Dunn announced two public offerings of equity, including 150 million common shares, designed to raise about $800 million. Dunn recently spoke with BusinessWeek Correspondent Roger O. Crockett in his first, and most extensive, interview as new CEO. Here are edited excerpts from their conversation:

Q: Restructuring the company and getting it financially sound, particularly the cash position, were the first and most immediate tasks at hand for you. [How are you going to] get it financially back to the level you'd like?

A: The financial health of Nortel is critical, but if you don't move it on multiple fronts, you will fall.... So the short-term financial position is very critical. We have a great relationship with our banks, and we work very hard at that.

But I'm also getting the customer engagement, because it takes you, I would argue, nine months from the time you engage a customer opportunity to the time you close it and see [it] hit your top and bottom line. A development cycle will take you 12 months, 15 months. So you need to move on all those fronts. If I just focused on my balance sheet, I got to tell you: That would be a big problem there.

Q: Where are you trying to take the company in terms of its cash position, and what are your targets for the different businesses?

A: If you put any one target front and center, or one objective front and center, you may find out you've done the wrong things. So how about a simple analogy: If I wanted to break even, I could cut my R&D in half, right? I would in the short term turn a profit. And then when you start to look at where the business goes, the shareholders are going to be very disappointed.

This great industry is going through a tough time, but you know, we have great strength in our optical capability.... We're committed to the optical business [despite the slow market].... And when it comes back, there are going to be fewer players in the industry, and it's going to take a next quantum leap forward in differentiated capabilities.

When they start spending again, and it might be...late 2003 or into 2004, you better have the ability to help your customers add a significant incremental value to their business. So we're spending money on end-to-end optical, from metro to long-haul, and we're committed to that. Next is voice over IP [using Internet protocol technology to transmit voice calls]. We're the only ones in the marketplace that are announcing contracts, that are actually deploying this capability.

Everybody thinks there's a wireline network and a wireless network. That's all getting merged. Converged. So the businesses that we've chosen are the businesses that enable that to happen.

So is it critical that I turn a profit next quarter, vs. damage this activity? No. But I know I can't just keep spending and not return to profitability. So I also have to have that balance to get my financial house in order.

Q: What's your cash position?

A: The numbers we reported -- $3.1 billion of cash, undrawn credit facilities are $3.5 billion, so you get $6.6 billion dollars of available cash.... We announced that we got a tax rebate from the U.S. government, and that generates $700 million of cash that came in early April. So if you add that back to my cash balance, I'm in the $7 billion dollar-plus range.

The other big issue that doesn't get addressed is that of the $4.8 billion of debt I have, the majority of that -- $4.3 billion -- is not due until 2006 or beyond. So I don't have a major repayment challenge. The cash I have is really to get this operation performing, not to repay my debt. So we're in good shape.

Q: But there's some concern that you burn through a lot of cash every quarter. And so the question rises: Can you afford not to merge with someone?

A: All my cash facilities are available. People talk about our customer financing. We haven't offered customer financing since last June, with the exception of Spanish telecom Telefonica. We've managed that very, very prudently. We've done an excellent job. We've never had off-balance-sheet risks and exposures that maybe some people have had. We've always been very prudent in our accounting practices.

There's no requirement for us to merge. One of the other issues on merging is: We have a very clear mindset about where we're going. Some people sometimes want to merge because they don't know what to do next. We know what to do next. We put our financial house in order.

Q: Are you looking for any opportunities to merge?

A: The answer is no. If something makes real good sense to accelerate Nortel's position in its designated market, I would be stupid as an executive and as a businessman not to keep my eyes open. But am I looking to sell Nortel? Absolutely not. Am I looking to merge? No. This is all about we have a game plan that wins, and we're playing to win. So all the other mindsets about merging are about when guys have decided they're going to lose.

Q: Are your restructuring and your layoffs nearly done?

A: We're basically through that process, other than a few timing issues.... We had a plan to get down to 48,000 people. Because we looked at how to simplify the business, we were able to identify another 4,000 people [to lay off. A possible sale of the optical parts business would bring the count to 42,000.]

One of the processes we went through is to look at how our management, executive layers, are organized. About a year ago, we had 750 executives, vice-presidents and above. Well, the senior team got together, and we got through every job that was deemed to be an executive position. Now, our executive population is under 300.... That generated, by the way, a lot of savings.

Q: It wasn't known publicly that you were a candidate for the CEO's job. Is this something that you had aspired to?

A: The belief I have is you put the company first. I was approached early on in the process as a candidate, and I suggested that they look outside. They went and looked, and came back to me and said, "Frank, we've looked outside, and we think you're the candidate." And I said I'd be pleased to take the job and challenge. So I was always considered one of the lead candidates.

This is all about not having a high profile. This is about making sure the company has a high profile. I did that as a CFO coming through the ranks, and I'll do that as a CEO. There's a role for a CEO to play as a leader, but some days, a CEO could overassume the responsibility of what this is all about, which is about the company.

Q: You have over the years been in many positions at Nortel. But most of them have been in some way related to finance. How will you accept the challenge of all that the CEO job requires?

A: I think that leadership is all about bringing the skill base you have and the knowledge base you have, and couple that with other knowledge bases, and deal in a business environment. The strength of Nortel's leadership in the marketplace is technology-based, and that's why I made sure I appointed a CTO to complement what I do have.

Now, when you needed to move forward on business issues in any realm, it's really engaging the customer.... It's about talking honestly, truthfully. The way you interact [with the customer] doesn't change, and I feel very comfortable.... You've got to bring value to them and show how you could support their initiatives and make them better off.

Q: What would be your response to those who don't believe you have had enough operations experience?

A: One of the things that leadership is all about is not worrying what all the [critics] in the world are thinking. My true test will be: How do my customers feel about Nortel's engagement?

Q: How would you characterize your leadership style?

A: I'm a delegator. I really believe a guy should run with the ball. No one could carry the whole weight of the team. Therefore, we all need to know that we trust each other. More important, we need to be very clear on what each role is on any one play.

Q: Your predecessor, John Roth, had a vision of the right-angle turn that personified rebuilding the company into an Internet organization. What is the focus for you, the strategy for resurrecting the company?

A: All great leaders are very good at executing a plan. You can create a vision. The hard work is making it happen. [Then] you decide what business you're going to be in. It turned out that we're going to lead with technology. That's where we're going to invest our money. What I spent the time on was to get all the people pulling the same direction.

I'm a believer that you got to get everybody on the same page. You can't do it yourself. We need to adjust some things. We need to go through some tough calls. And probably what you do when you make a tough call is you explain it to people. You be honest with people.


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