NORTEL'S NEW EXECS BRING CISCO EXPERIENCE

After taking heat for promoting too much from within, Nortel Networks named two former Cisco Systems executives as its chief operating officer and chief technology officer last month, taking a bold step toward potentially transforming its identity to that of a more aggressive company with greater authority on the next generation of network technology.

Nortel is no slouch when it comes to next-gen technology, having been hailed by RHK in July 2004 as “thus far the only leading [optical networking] vendor that also has a strong next-gen revenue position.” But analysts say the company ended up losing market share last year, perhaps distracted by management changes and financial restatements. With Cisco's former chief science officer (and 12-year Cisco veteran) Gary Kunis as its new CTO, Nortel gains formidable IP and Ethernet credibility.

“The architecture for public networks is switching to that of enterprise networks; it's IP-based,” said Susan Kalla, who covers Nortel for Friedman, Billings, Ramsey & Co. “You need the person steering the ship to understand IP technology.”

In addition, Nortel's new COO, Gary Daichendt, could potentially bring Cisco's characteristic aggressiveness to Nortel. As a former Cisco vice president of worldwide operations, Daichendt is adept at driving employee productivity. For the fiscal year ending July 2000 (his last year at the company), Cisco reported average net sales per employee of $556,705. Nortel reported $320,000 that year and $289,903 in 2003. However, Pacific Crest Securities analyst Tim Daubenspeck considers Daichendt something of a “wild card” because he's been in retirement since 2000. “No one's seen him for years,” Daubenspeck said. Some analysts think Daichendt is being groomed to become Nortel's CEO because current CEO Bill Owens — who hastily took the reins during the company's accounting crisis — seems to present himself as an interim leader.

Cultural change in a firm of Nortel's size wouldn't happen overnight. And some aspects of Cisco's sales culture may not easily translate to Nortel, given the vastly different dynamics of enterprise and carrier customers (Cisco's and Nortel's main focus, respectively). An old joke about Nortel and Cisco, one source said, is that Nortel salespeople sell their gear on the golf course, while Cisco salespeople “just drop-kick their boxes in and then roar away in their Porsches.” In other words, carrier equipment vendors take the time to build long-term partnerships with their customers — integrating equipment, etc. — whereas enterprise vendors quickly move on to the next sale.

“Cisco is more of a bare-knuckled kind of play,” Kalla said. “Nortel's is more of a gentleman's business. You don't have to race to bring out new products.”

The new appointments also bring to mind the recurring rumors that Cisco and Nortel might one day merge, combining their complementary customer bases. (The chatter reached its highest pitch last summer when the two firms met privately in Ottawa.) Having Cisco veterans atop Nortel management could theoretically grease the wheels of such a merger. But with a wealth of legacy products, accounting issues and pension liabilities, Kalla said, Nortel's urge to merge might not be mutual. “Would [a Cisco/Nortel merger] make sense for Nortel? Definitely,” she said. “Would it make sense for Cisco? Much less so.”

Ironically, if Nortel achieves any positive transformation, it will owe it all to the same accounting scandal that has been the company's scourge for more than a year. That scandal, in which former CEO Frank Dunn and several others were fired, allowed Nortel to clean house a little, overcoming the conservatism and insular hiring habits that critics say helped cause the scandal in the first place.