John Roth started working for Northern Telecom, in 1969 as a design engineer. Roth rose with the company and in 1997, he was offered the position of CEO of Northern Telecom. After reluctance, Roth accepted the role and decided to take the company in a new direction. Roth decided to invest in internet technology so “Roth went shopping for Web-tech companies, and, in May 1998, Nortel announced the purchase of San Francisco–based Bay Networks for US $9.1 billion in a share-for-share deal” (Collins, 2011). In September of 1998, Roth changed the company name to Nortel Networks, a name reflected the new changes. Over the next 30 months, Nortel Networks acquired 17 other companies for a mere $33 billion. Once the initial …show more content…
One of the major problems was overvaluation. "Overvaluation occurs when there is a large deviation between share price and underlying value, when there is a near impossibility in delivering to expectations" (Collins, 2011). This created an abnormality in Nortel’s share price and its principal value. This overvaluation creates a high chance of not achieving company expectation, thus resulting in the fall of Nortel Networks.
Nortel’s accounting practices were also called into question. According to Collins (2011), "manager-analyst interaction was characterized by optimistic analyst forecasts that drove stock market valuations higher, which in turn pressured managers to meet those forecasts." To coverup poor performance, Nortel reported street earnings to beat the market standard. "The company began reporting earnings on a “continuing operations” or “street earnings” basis that excluded many line items such as extraordinary charges, unusual items, depre- ciation, and charges from mergers, line items that the company classified as “nonreocurring” or “noncash" (Collins, 2011). Nortel was booking furture sales to create the impression that it was a stable longterm company. According to Collins (2011), "Dishonesty in the earnings management game sets irreversible forces in motion, as borrowing from future revenues neces- sitates …show more content…
"Various incentives and motivations given to Nortel’s top management, and their ensuing actions, led to the company’s meltdown" (Collins, 2011). Nortel’s board of directors, although independent, was structurly unsound. “"Nortel’s board of directors was independent, it still fell short along three other dimensions: board size, the presence of financial experts, and the multiple directorships held by board members" (Collins, 2011). Nortel’s large board size allowed for less effective monitoring. With such a large board, directors tend to pass off responsibilities and take longer making decisions. This allowed for John Roth to purchase companys that were not scrutinized by financial