Can an Iron Man Remake Nortel?


The film Coach Carter tells the story of a man who takes over a Richmond, Calif. high school basketball team rife with crises: delinquent players, low morale, bottom-of-the-barrel finances. The tough-as-nails Carter imbues the down-and-out players with stamina, military-like discipline, and a reinvigorated self-esteem.

Think of Mike Zafirovski as Nortel Networks' (NT) Coach Carter. Zafirovski, an energetic, well-regarded exec who last ran operations at Motorola (MOT), was named chief executive of the troubled Canadian telecom-equipment maker on Oct. 17. Shares were up more than 5%, to $3.48, following the announcement.

EMERGING FROM "CRISIS." He'll take over for current Nortel CEO Bill Owens on Nov. 15. Owens, a one-time Navy admiral, had assumed the helm of Nortel in the spring of 2004. He was charged with steadying the ship as Brampton (Ont.)-based Nortel reeled from an accounting scandal that led to the ouster of 10 executives, including former CEO Frank Dunn.

Nortel had misrepresented results over several years, possibly in an effort to trigger bonus payments, sparking regulatory and criminal investigations in the U.S. and Canada. The company was forced to restate a half-decade's results, diverting management's resources and spooking some customers (see BW Online, 3/22/05, "More of Nortel's Slip Is Showing"). It was a period that Chairman Harry Pearce on Oct. 17 called an "absolute crisis."

With Nortel on the path to recovery, it's now time for a visionary chief with plenty of telecom-operations experience. Zafirovski fits the bill. He excelled during the hard-driving Jack Welch era at General Electric (GE), and he turned around Motorola's ailing cell-phone business before rising to become COO of the Nortel rival in 2002.

STRETCHED THIN? He left Motorola in 2005 after being passed over for CEO -- a title that went to Ed Zander, formerly of Sun Microsystems (SUNW) (see BW Online, 1/13/05, "Motorola's Mr. Fix-It Exits"). "Mike has a superb record of being a change agent inside Motorola," says Matt Hoffman, an analyst with Moors & Cabot.

The Nortel job won't be as easy (see BW Online, 5/4/05, "More Grim Tidings for Nortel"). Motorola might not have been performing up to snuff, but it was at least No. 2 in its chief businesses, making cell phones. Nortel has its hands in several businesses -- from optical networks to wireless infrastructure to government systems. But it's not dominant in anything.

Zafirovski has told analysts that he expects to achieve operating margins, a yardstick of profitability, of 13% to 19% before long. That's a tall order for a company that, according to UBS analyst Nikos Theodosopoulos, now has operating margins of 6%. "It will be a challenge to achieve that level of profitability with the market position that they have today," he says. "When you're No. 4 or 5 in a market, you can't get that high of a margin because the No. 1 and No. 2 guys get that."

PRUNING TIME. That doesn't mean Zafirovski won't try. As competitive as they come, Zafirovski pushed business leaders at Motorola to get products out faster at lower costs. Borrowing from Jack Welch's playbook, he graded business performance and led a company plan to weed out the lowest performing 10% of managers.

A tireless athlete who recently completed the Iron Man triathlon between business meetings, he shook up Motorola with boundless energy and towering expectations. Under his leadership, the mobile-phone unit went from 4% margins before he took over in 2000, to 10% in 2004 as he neared the end of his tenure as COO, according to Moors & Cabot.

He'll need to bring the same energy to Nortel to boost deflated morale. Zafirovski also will need to get out of businesses that aren't performing well, such as the optical unit, and enter or expand in growth markets. For instance, WiMax, a form of wireless broadband, is a wide-open market with loads of potential, analysts say (see BW Online, 10/5/05, "Why WiMax Could Hit the Hotspot").

"$10 BILLION OPPORTUNITY." Mitch Mitchell, a vice-president at consultant A.T. Kearney, says Nortel needs to become a bigger player in next-generation wireless networks, such as the 3G systems that carriers like Verizon Wireless and Sprint Nextel (S) are putting into place. "That's a $10 billion opportunity," he says.

Richmond High's Coach Carter found success through a combination of fundamentals and tough love. Zafirovski won't be wearing a whistle or basketball shorts, but he'll push just as hard to remake Nortel into the Canadian jewel that its board of directors wants it to become.

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