Northern Telecom Restructures to Try To Stay Competitive

NORTHERN Telecom, Canada's fourth most profitable company last year, was hammered last week by investors who dumped the company's stock after it announced a $1.03 billion second-quarter loss.

Besides losing $150 million on its operations, this maker of telephone equipment said it would swallow a $940-million restructuring charge. Its global work force will be cut by 5,200 or 9 percent, including about 2,000 Canadian workers.

Some analysts say, however, that despite the huge loss and challenges to the company's core business of selling very large telephone switches, Northern Telecom's problems have been blown out of proportion.

"I don't think the picture is being portrayed as fully and in as balanced a fashion as the underlying facts would suggest," says Michel Guite of Dillon Read & Co., a New York brokerage. "I do a survey every summer of telecommunications engineers. These are the facts.... AT&T and Northern Telecom lead the world in telecommunications hardware and software."

Mr. Guite does not deny that Northern Telecom is in second place and has a fight on its hands holding market share against AT&T, or even that there may be "technical problems of unknown dimensions" lurking in Telecom's software laboratories. "It's only normal to see the worst and react," he says, "and all I'm saying is that investors are seeing the worst."

Northern Telecom warned investors June 25 of the impending loss. Since then, its market value has fallen more than $3.5 billion. The stock sagged further after last Wednesday's announcement when the news was far worse than expected. The company said it expects to be profitable in the fourth quarter.

Still, Gilbert Heath, a telecommunications analyst with Computer Intelligence Inc., a market research firm in La Jolla, Calif., says Northern Telecom is gaining market share in the fastest-growing segment of the industry: small business systems with more than 40 but less than 500 lines. "I'm bullish on the company," he says.

Northern Telecom is having problems in streamlining and updating the complex software that runs its largest switches, its bread and butter. The software code is so complicated that it is difficult to modify to add advanced features. Last week the company said $158 million of the restructuring charge would be to rework its software.

While some investors have viewed that move negatively, Guite says he does not agree. "It makes perfect sense that Northern Telecom, as leader in the world in digital office switching, would be the first to separate its operating systems software from its applications software," Guite says. "It's a risk, but it's a positive [one]. I think the market is overreacting."

The company also announced that it would sell its STC submarine cable division to Alcatel Cable of France for $900 million. Besides cushioning the impact of the huge charge on earnings, the move focuses the company more directly on its core business.

"It looks like they've increased their emphasis on smaller business systems - and that's timely," Mr. Heath says. "If they had continued their emphasis on the high-end systems they would be vulnerable because there's not a lot of people left to buy up there." Instead, the large majority of the 60,000 people he polls each year say they love Northern Telecom. "Northern Telecom is doing exceptionally well, as has AT&T," Heath says. "It is the secondary players that are now falling away."