Poor old Nortel Networks — or “No-tell Networks,” as one wag dubbed it after the fourth or fifth time the company had to restate its earnings. It was bad enough when the company flamed out so quickly after becoming the king of the Toronto Stock Exchange (and of many people’s investment portfolios), but then that was followed by the repeated financial restatements, the firing of senior executives, and so on. Then there was the whole Bill Owens fiasco, in which the former Navy officer did virtually nothing to move the company forward, and in fact arguably set it back (by hiring two senior Cisco executives and then quickly showing them the door).

The end result is that Nortel has been unable to make much headway in the telecom or networking equipment market, and that hasn’t changed much lately, despite the best efforts of Mike Zafirovski, the new CEO. Now, the company finds itself even further behind, with the reported merger of the networking arms of Finland-based cellphone giant Nokia and German telecom equipment vendor Siemens AG. The deal as described would create a $30-billion equipment supplier that would rank up there with Lucent/Alcatel. And it removes the possibility of Nokia merging with Nortel, an idea that was recently floated by analyst Gus Papageorgiou.

It’s not surprising that Nokia would choose Siemens over Nortel, if it ever even considered a similar merger with the Canadian company. A history of financial restatements, allegations of improper behaviour by executives, lawsuits flying left and right including class-action lawsuits, and products that have fallen further and further behind the competition over the past few years. Not a great bio if you’re looking for a hot date with one of the telecom industry’s leading players. Nortel has raised even more question marks with some of its recent moves, including a short-lived partnership with China’s Huawei.

So now it seems that a merger with Nokia is off the table, and Siemens is also off the market. Who does that leave for Nortel to pair up with — Ericsson? Motorola? Mark Evans has some more thoughts here. I think Mike Z. had better put on his dancing shoes and start thumbing through that little black book.

The marketing tagline for the 1970′s shark-attack movie Jaws 2 was “Just when you thought it was safe to go back in the water.” If you replaced the word “water” with the name “Nortel,” you’d probably have a fitting tagline for what’s going on at Canada’s favourite love-it-or-hate-it networking-equipment company, Nortel Networks (or “No-tell” Networks, as one wag dubbed it). Except, of course, that for Nortel the latest financial restatement isn’t just the sequel to its previous financial troubles — it’s the third in a series of such restatements, each of which affected several years worth of results.

In case you need a refresher course in how not to run a giant telecom supplier, Nortel has spent the better part of the past three years restating its results, changing chief executive officers and otherwise reorganizing itself. Not long after John Roth left the company and was replaced by former chief financial officer Frank Dunn, the company announced that its results were not reliable. That produced the first restatement, which altered revenues and profits for several years, and led to an internal review that eventually produced a second restatement to correct errors in the first one, which delayed the company’s official filings for more than a year. As a result of the review, Mr. Dunn and half a dozen other executives were fired.

Former U.S. Navy officer Bill Owens came on board to straighten things up and get customers back on board, but after an acquisition that didn’t get many cheers and a failed succession plan that got a lot of boos, he left and was replaced by former Motorola executive Mike Zafirovski. And a new CEO seems to require yet another restatement, this time for various contracts that were signed in 2003, 2004 and part of 2005. Why? Mike Z says it’s because the company is now applying more stringent rules to how it accounts for contracts. And guess what? He said he can’t say for sure that there won’t be more restatements or “adjustments” as they go through the rest of the deals from last year.

To continue with the horror-movie analogy — one that some Nortel investors might see as appropriate — let’s hope the company isn’t trying to create a 10-movie legacy like the Halloween or Nightmare on Elm Street franchises. Investors have suffered enough already.

Here’s a column I just posted at globeandmail.com about Nortel’s quarterly results:

“At this point, it’s not hard for Nortel Networks to impress anyone with its financial performance. All the company has to do is report a fairly clean quarter with maybe a little bit of growth here and there, no massive writedowns and no slashing of growth forecasts, and everyone goes home happy. And that’s pretty much what the networking-equipment maker did in its latest quarterly report – in fact, it did even better than that. Revenue, for example, climbed by a substantial amount in what is traditionally a weak quarter, and Nortel also narrowed its loss. To add some icing to the cake, the company even boosted its growth outlook for the current year.

So that’s it then — Nortel’s back. Right? Not so fast.

While Nortel’s results look especially good when compared with the financial debacle of the past three years, the company can’t count on enjoying that kind of favourable comparison forever. At some point, it has to show that it is actually getting stronger and increasing its profits and market share, not just when compared to the lowered expectations of the past. On those terms, Nortel still has some distance to go before it is out of the woods. At least now it can see the clearing through the trees — all it has to do is actually get there.

One of the most positive events for Nortel has to be the arrival of former Motorola executive Mike Zafirovski as chief executive officer, despite the lawsuit filed by his former employer and the $11.5-million Nortel had to pay to settle it. If anything, all that does is reinforce how strategically important Motorola feels he is. But the biggest boost is simply getting someone who has experience in telecom equipment at the helm. Whatever other qualities he might possess, his track record compared with his predecessor has to be a plus when it comes to restoring some of the market’s faith.

In effect, this has helped to cancel out some of the negative impressions created by the bizarre Daischendt affair, in which Mr. Owens hired and praised former Cisco Systems senior executive Gary Daischendt, only to turn around a few months later and announce that both he and another former colleague from Cisco would be leaving Nortel, due to a difference of opinion on how to run the company.

Coming at a time when the networking-equipment maker was recovering from a toxic combination of forced financial restatements, securities investigations and shareholder lawsuits — not to mention continuing weakness in the telecom-equipment market — this was like a kick to the solar plexus for many people both inside and outside the company. It certainly didn’t endear the company to any of the customers whose business it was trying to win either. Although some critics say investors have been too quick to celebrate the arrival of Mr. Zafirovski, having a solid industry presence at the helm is bound to help Nortel rebuild its reputation a little.

While having Mike Zafirovski around is a positive for Nortel, however, there are still plenty of negatives to go around, even if you leave out things like the multiple shareholder lawsuits against the company and an ongoing investigation by the Securities and Exchange Commission.

One of the things that caused some concern in the company’s latest results, for example, was a drop in profit margins — a drop caused in part by a $71-million loss on a wireless equipment contract with a customer in India. In fact, as one analyst noted, the losses that Nortel has recorded to date on its Indian contract are almost equal to the amount of revenue it has booked on the deal. Although Nortel says it needs to take on such contracts in order to build its market share in countries like India, some wonder whether it’s worth it if the company has to effectively supply its products at a loss.

The company’s operating profit margin was also nothing to write home about — it came in at negative 0.5 per cent, meaning Nortel didn’t make money on its core operations after expenses. Wireless, which had been one of Nortel’s strongest segments, also had a disappointing quarter. The company’s sales of wireless products were weaker than most analysts expected, in part because sales of new CDMA products dropped by 19 per cent due to (among other things) a slowdown in network construction at Verizon and Sprint, two major customers. Some of that is likely due to consolidation, since Sprint recently acquired and is still digesting Nextel.

Several analysts say they are bullish on the future, and expect Nortel to boost its profit margins as telecom carriers in North America and Europe roll out new optical and wireless networks, but others say that Nortel has grown weaker during the past two years, and is no longer getting the key contracts it once did. “We have had major reservations about the competitive position of Nortel over the past year as our checks with industry contacts have continued to suggest a reluctance on the part of some to do business with Nortel,‿ said Moors and Cabot in a research note. “As a result, we continue to believe the company is losing market share.‿

Over to you, Mike.”