Foreign at the turn of the past, Millennium Canada was a Powerhouse In the Telecommunications industry. Throughout the 1980s and 90s, the Canadian company Nortel Networks was the global leader in design and manufacturing of advanced telecommunications and internet infrastructure. In the year 2000, it was estimated that two-thirds of all internet traffic in North America ran through Nortel's equipment. With 90 000 employees and a market cap of 470 billion dollars, it was the largest company in Canada by far at the peak of the tech bubble.

In fact, it represented one-third the value of the entire Toronto's Stock Exchange However, this success was short-lived when the tech bubble popped, Nortel's share price dropped. Like A Rock Wiping away hundreds of billions of dollars in shareholder value. Facing mounting losses, the company's top Executives allegedly cooked up an elaborate plan to fabricate fake profits and set themselves up to receive tens of millions of dollars in bonus payments as the fraud was exposed. Nortel struggled to keep up with the increasing competition and continued to lose money.

The story finally ended into 2009 when the company filed for bankruptcy. At the time, they had 2 000 employees, about two percent of the workforce they employed just 10 years prior. In this video, we'll take a look at the shocking rise and fall of Canada's largest ever company. The Epic decline of Canada's biggest company shows the perils that can befall both companies and individuals when they fail to keep up with the technological innovations.

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The first 200 of you will get 20 off. Brilliance annual premium subscription Foreign Works Can trace its roots all the way back to the late 1800s. Shortly after Alexander Graham Bell invented the telephone, he founded Bill Canada which created an operated telephone systems within. Bell Canada Their mechanical Department was tasked with designing and Manufacturing the equipment needed to run the network.

This primarily consisted of building switchboards where the operators would physically connect the telephone wires of the caller and the recipient's telephones. Bill Candos put out the mechanical Department into an independent company which would eventually become Nortel Networks. Throughout the 1900s, Nortel was always at the Forefront of telecommunications technology. In the 1970s, they created the Dms-100 Digital switching system, which could operate 100 000 landline telephones at a time.

This technology was a game changer, greatly reducing the cost of telephone service. By the 1990s, it became clear that Landline telephones was a mature industry with little growth opportunity. All The Rage was about the internet, which was just starting to catch steam. Nortel knew that if they wanted to stay on top of the world old, they need to Pivot to the internet.

Throughout the 1990s, they spend 30 billion dollars on Acquisitions. The single biggest acquisition they did was Bay Networks, which they acquired for 8 billion dollars. Bay Networks produced routers and other equipment necessary to operate internet networks. Bolstered by these new acquisitions, as well as their deep expertise in the Telecommunications Technologies Nortel started producing various switching systems and other equipment necessary for operating the Internet.

It's important to remember that all this was happening in the midst of the.com bubble. Thousands of new internet-based companies were being formed and the demand for internet connectivity was expected to grow exponentially. Internet service providers like Global Crossing and Worldcom were spending tens of billions of dollars laying thousands of miles of Internet cables across the U.S and even laying cables across the Atlantic Ocean to connect North America and Europe. These cable companies bought billions of dollars worth of Nortel's equipment to operate their increasingly complex networks of internet cables.

Nortel became the market leader, not only within its Home Market in Canada, but also across the entire world. By the late 1990s, two-thirds of all Internet traffic in North America went through Nortel's equipment. All of this was highly beneficial to Nortel, which saw its Revenue more than double from 13 billion dollars in 1996 to more than 27 billion dollars in 2000. Unsurprisingly, Wall Street fell in love with Nortel's stock with investment Banks constantly raising their price targets and investors buying the stock Handover Fist This pushed Nortel's market cap up to a peak of 470 billion dollars in 2000, making it the most valuable company in Canada By far, Nortel alone made up more than 30 percent of the entire market capitalization of companies traded on the Toronto Stock Exchange.

However, not all was Rosie. While Nortel's Revenue was growing substantially, competition was also increasing. Two American competitors, Cisco and Lucent as well as a Swedish company Ericsson were all rapidly catching up the Nortel's technology. but the Internet Market was growing so fast that there is more than enough room for all these competitors to grow.

at least for a time. Around the year 2000, the Internet service providers realized they were spending too much on Internet infrastructure. demand was too weak to provide an acceptable return on investment. Basically, they had overestimated how fast the internet would grow and thus overbuilt network capacity.

In the early 2000s, almost all the internet equipment manufacturers, including Nortel saw massive declines in Revenue. In the year 2000, Nortel's senior management team saw that customer demand was drying up and they were on track to miss Wall Street's Revenue estimates by about a billion dollars. Such a large Miss would be disastrous for their share price. They needed a way to increase reported Revenue Foreign Normally, revenue is recognized when the customer takes possession of the good or service in question, but that is not always the case under very specific circumstances.

Us generally accepted accounting principles or Gaap allows companies to use build and hold accounting. This method allows you to recognize Revenue before the customer takes physical possession of the product. A customer might not have storage space to take physical delivery of the product until next year, but they want to buy the product now just in case it goes out of stock next year. In the meantime, the seller holds on to their product for a period of time after it has technically been sold.

The conditions for using Bill and whole accounting are very strict. The buyer must proactively ask a seller for a bill and hold transaction and have a reasonable explanation as to why they want this. The buyer must legally commit to buying The product at a fixed state in the future. It must be reasonably expected that they will have the funds to pay for the purchase at that day, the product must already be finished.

and finally, the seller must segregate the product from its other inventory as it is technically already owned by the customer. Because of the onerous conditions that must be met. Most companies don't bother using Bill and Hole accounting even when they technically could. It's simply not worth the effort to prepare all the necessary paperwork.

In fact, Nortel Networks itself had previously instructed its accountants to never use Bill and Holy Accounting for this very reason. But this all changed in 2000 when it was clear they are on track to miss their revenue. Target Nortel approached their customers and offered them discounts if they placed orders in 2000 for equipment they would need in 2001. Offering discounts to customers who order in advance is a completely legitimate sales tactic.

But if you do this is not eligible for Bill and hold accounting treatments and you must wait until a product is physically delivered to the customer before recognizing the revenue. Nortel Recognized the revenue early in clear violation of Gap accounting rules. Additionally, Nortel recognized hundreds of millions of dollars of Revenue by selling their equipment to a related party distributor. The revenue should only have been recognized once the distributor sells these products to end customers.

Given the deteriorating demand from end customers, the distributor was not able to sell the equipment Nortel inappropriately recognized this as Revenue even though the equipment in question was just sitting in the distributor's warehouse through these accounting gimmicks. Nortel Was able to pull forward one billion dollars of Revenue in 2000 in the analyst expectations, but this was merely kicking the can down the road. In 2001, the industry continued to deteriorate and revenue was more than cut in half. The deterioration of the business was not the fault of the company's Executives The market for the internet networking equipment was declining across the board.

Instead of trying to cover up their losses which would have been nearly impossible, they decided to exaggerate them for the full year of 2001. They reported a massive 27 billion dollar loss Nortel Didn't actually lose 27 billion dollars of cash. They didn't even have that much cash to begin with. The vast majority of these losses came in the form of non-cash write Downs related to Prior Acquisitions As well as the restructuring efforts, the restructuring was designed to reduce the size of the company in light of decreasing demand.

This included laying off 60 000 employees or about two-thirds of their Workforce When a company undergoes such a dramatic restructuring, it is normal to recognize large write downs and build up reserves for potential future restructuring costs. Nortel had done numerous Acquisitions over the prior few years, making their business structure exceedingly complex. Thus, when they announced their 27 billion dollar net loss, most people didn't question it. As it turns out, the 27 billion dollar loss was massively over inflated.

But why would they want to inflate the size of this loss? Wall Street Loves a good turnaround story. Making a 27 billion dollar loss in one year and then a one billion dollar profit in the next year shows that the restructuring was successful. On the other hand, if you report a 25 billion loss in one year and then another one billion dollar loss in the next year, this shows that the restructuring was a failure and investors will give up on the stock. Additionally, the Board of Directors approved a Compensation Plan whereby the company's top Executives will receive tens of millions of dollars worth of bonuses if the company does return to profitability in 2002.

CEO Frank Dunn Who had previously been CFO publicly stated that he expected Nortel's return to profitability in 2003 and appears like investors believed him. Nortel's stock price never came close to recouping its.com Bubble highs. If you zoom into the stock chart, you can see that in the year following Dunn's return to Profitability statement, the stock price increased tenfold from about one dollar per share. It's more than ten dollars.

Unfortunately, Dunn's optimistic predictions did not match up with reality. Nortel had just lost one of their biggest customers when Worldcom went bankrupt in 2002. Their remaining customers had already bought more than enough networking equipment in Prior years, so demand was still weak. Nortel was on track to report a net loss for 2003.

So Dunn allegedly orchestrated a plan to increase reported earnings by reversing some of the write Downs they did in 2001. basically, they purposely recognized too much losses in 2001, which allows them to reverse these losses and Report profits in future years. As a result of this manipulation, Nortel was able to report a 732 million dollar net profit for the full year of 2003.. this returned to profitability triggered 19 million dollars of bonuses to the top Executives with CEO Frank Nunn personally raking in 3.6 million dollars in cash bonuses as well as an additional 2.9 Million Dollars in restricted stock units.

All told, Dunn personally benefited to the tune of 6.5 million dollars. By the middle of 2003, Nortel's auditor Deloitte started to get suspicious about the timing of Nortel's Reserve releases, which just so happened to help them achieve their profitability targets due to Deloitte's concerns. Nortel stated in a regulatory filing that they had initiated a comprehensive review of analysis of identifiable categories of its assets and liabilities. The amounts under review were reported when Nortel Network's balance sheet and income statement were much larger.

Specifically, what would have been relatively minor amounts in Prior periods may be considered to be material in current periods. So while they did admit that there are some accounting problems, they tried to downplay it as much as possible Over the past three years, Nortel had laid off two-thirds of their employees and their revenue had also decreased by a similar amount. What they were claiming was that there must have been some minor accounting errors from a few years ago when the company was much bigger. At the time.

those errors were too small to have a material impact on their financial statements. Now that the company is much smaller, these minor issues may be considered material. Despite these ever sit downplay the severe 30 of the accounting issues, Senior Executives knew the situation was far more serious. In the summer of 2003, Nortel's corporate Controller Michael Goligli sent an email to the accounting team saying quote: if we cleaned up the balance sheet, the ability to deliver earnings based partly on discretionary elements pretty much goes away.

Unglow The massive 27 billion dollars of over-inflated losses from 2001 served as an emergency. Reserve If they ever needed to boost their profits, all they had to do was reverse some of these fake losses. If if they got their act together and cleaned up their balance sheet, they won't be able to manipulate their earnings going forward. In early 2004, Nortel's audit community did some digging and found that the accounting problems were far more serious than they were initially led to believe.

It became clear that they were not honest mistakes, but instead a deliberate plan by the Senior Executives to line their own Pockets with undeserved bonus payments. Following this, Revelation Nor tells board of directors fired the three alleged masterminds of the fraud: CEO Frank Dunn corporate controller Michael golgli and CFO Douglas Beatty Nortel had to restate their financial statements twice to clean up all the manipulations. The three Executives were arrested by Canada's Mounted Police and charged with fraud. All three men were eventually acquitted without serving any jail time in 2007.

Nortel Settled with the SEC for 35 million dollars without admitting or denying the commission's allegations. With this settlement, Nortel Could finally move on. Thank you! Even after the accounting issues were sorted out and the executive team was replaced, Nortel continues to lose money and their stock price continued to decline. This culminated in 2009 when they ran out of cash and were unable to make their interest payments.

Nortel Networks was just 10 years prior was Canada's most valuable company filed for bankruptcy protection. The exact causes of Nortel's demise is subject to debate. The accounting Scandal didn't help, but it was merely a symptom, not the root cause. The reason they did the accounting scandal in the first place was because the business was already losing money.

Despite Nortel's High Market valuation during the.com bubble, they never generated substantial profits. This put them in an incredibly vulnerable position when the.com bubble popped, forcing them to lay off two-thirds of their Workforce. The reduction in Workforce greatly decreased their ability to develop new products while the entire industry face had ones. in the early 2000s, some of Nortel competitors like Ericsson had much larger cash reserves and didn't need to implement Draconian layoffs.

The other main competitor, loosen was smaller than Nortel and likely would have suffered the same pay. but they were able to save themselves by merging with the French Telecommunications giant Alcatel in 2006.. the combined Alcatel Lucent company was eventually acquired by The Finnish Telecom Giant Nokia to form an even bigger company as Internet Networking and Telecommunications Technologies advanced economies of scale became increasingly important, the industry was consolidating. Nortel's competitors were getting even bigger while Nortel was getting smaller.

The best option would have been for Nortel to be acquired by a larger competitor, but given the history of the accounting, Scandal competitors were understandably reluctant to do this. Nortel was forced to struggle as a sub-scale operator, which eventually proved unsustainable. Another theory is that Nortel's demise was due to espionage by the Chinese government who stole Nortel's intellectual property and pass it along to their own Telecom company. Huawei In 2004, a security consultant named Ryan Shields claimed to have found multiple data breaches which allowed hackers base in China to seal thousands of sensitive documents from Nortel's servers.

Shields Went so far as to say that economic Espionage caused Nortel's failure. The idea was that Huawei was able to out-compete Nortel by stealing their Trade Secrets While it may very well be true that Chinese hackers stole Nortel's intellectual property, this was not the cause of Nortel's demise during the 2000s, Huawei sold telecommunications equipment primarily to poorer countries in Asia and Latin America who couldn't afford Nortel's relatively more expensive equipment. It wasn't until the 2010s that Huawei expanded into more developed markets. By that point, Nortel no longer existed to the extent that Huawei stole Nortel's intellectual property, which Huawei vehemently denies.

this only allowed them to take Nortel's market share after Nords Hill went bankrupt. Alright guys, that wraps it up for this video. What do you think about Nortel Networks let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.