Motorola drops suit against Zafirovski, settlement could be barrier in new role

Motorola Inc. may well have put to rest its lawsuit against Mike Zafirovski, its former chief operating officer that Nortel Networks Corp. hired as CEO, but that’s not to say the situation’s completely settled. The Motorola-Zafirovski deal includes restrictions that could ham-string the executive in his new Nortel post, says one industry observer. "There are two things that jump out," says Carmi Levy, a technology analyst at Info-Tech Research Group in London, ON. He’s speaking of the agreement between Motorola and its past president Zafirovski, whom Nortel hired on October 17. "One, he can’t talk to certain customers. And two, he’s not allowed to advise Nortel on issues relative to Motorola. "How can you be a fully formed CEO with full run of the place when you can’t even formulate policy vis-à-vis one of your main competitors? It’s like being forced to play ping pong with one hand tied behind your back, an eye patch and a nylon sock over your head." Nortel hired Zafirovski to take over from Bill Owens, the current CEO hailed for putting the troubled telecommunications gear maker on the right path after years of financial problems. But just two days after Nortel announced Zafirovski as its new chief executive, Motorola sued the man, apparently concerned that he would let slip secret information that could give Nortel, Motorola’s competitor in the wireless arena, an advantage. On October 31 Nortel and Motorola announced that the latter had quashed its lawsuit against Zafirovski, opting to settle out of court instead. The settlement terms include particular restrictions: the executive can’t disclose Motorola trade secrets or confidential information. As well, Zafirovski and Nortel are prohibited from poaching Motorola employees "under certain circumstances," according to a Nortel press release. "The settlement also includes restrictions, until July 1, 2006, on Zafirovski’s communications with certain specified companies, some of which are Nortel customers, and limitations on his ability to advise Nortel on competitive strategy or analysis relative to Motorola for a defined period," reads the press release. It also says Zafirovski agreed to pay Motorola US$11.5 million, part of his severance payment. Nortel said it would reimburse Zafirovski for that payout. According to Levy, although the settlement means Nortel gets to keep its newfound leader, the agreement also makes Zafirovski less effective in the role. "Right out of the gate, he’s hobbled. Every time he wants to make a strategic decision or even talk to someone about anything, he has to think about the terms of this settlement first. Everything he’s going to do has to go through this filter. That is a huge resource drag on a CEO in any industry, let alone one as competitive as telecom."Nortel’s spokesperson flatly refused to entertain questions about Zafirovski’s effectiveness. "Everything we are saying about this matter is in the (press) release," she said. Ian Angus, a telecom industry analyst at Angus TeleManagement Group Inc. in Kemptville ON, says non-compete agreements like the one Motorola and Zafirovski signed are tricky creatures. On one hand, they purport to keep employees from disclosing confidential information. But in practice, "these things are characteristically unenforceable." Zafirovski could blab until he’s blue in the face. Motorola need never know necessarily, he says. But Angus isn’t convinced the settlement’s restrictions will hinder Zafirovski to a large degree. "I don’t think anyone will be awfully concerned about it. The most likely situation in which any problem would arise would be if Nortel is bidding against Motorola for a customer’s business. As CEO, he would have to abstain from that.""I think Nortel’s bigger problem is not how to compete with Motorola, but how to organize itself to get by at all. Having a strong CEO is important to them," Angus says. Nortel certainly has had its share of problems over the past five years. Its stock price plummeted after the dot-com and telecom busts circa 2001. Some of its executives were painted as criminals in insider-trading investigations. The company had to restate a number of its financial results last year. It has rearranged its business at least lines three times since 2000. And it practically installed a revolving door for its C-suite, to accommodate the suits coming and going so often. Meanwhile Nortel has also been doing its best to beef up its presence among enterprises, to help balance its carrier-heavy history. And the company has pumped millions of dollars into research and development projects that have helped it win respect in the wireless sector. Last week Nortel announced relatively good news on the financial front. The third quarter of 2005 resulted in revenues of US$2.66 billion, up compared to Q3 2004 revenue of US$2.18 billion, but down slightly from Q2 2005 where revenue was US$2.86 billion. Q3 2005 also resulted in a net loss of US$105 million, which is substantially better than last year’s performance of a net loss of US$259 million but worse than Q2 2005, when Nortel profited by US$45 million. Nortel’s CEO Owens, who gives up the post to Zafirovski on November 15, said the loss came from restructuring costs and other payouts related to re-filing tax results after the 2004 financial restatements. The company’s carrier division, which sells to telecom service providers, pulled in $US754 million, 41% more than it did last year. Certainly the third quarter brought some good news for Nortel, but for all of the positives, the firm needs a strong leader to smooth over the rough patches. Owens laid the groundwork for a new, improved telecom equipment maker. It’s up to Zafirovski to take the company from damage control to controlled ascent. He might be the right person for the job – Nortel’s selection committee certainly seems to have thought so. But it could be some time before the newcomer proves able to best the firm’s past problems. The Motorola restrictions make the task that much more challenging. As Levy says, "Nortel has needed a white knight all along. Zafirovski...may very well be the white knight, but he’s forced to ride his horse with a little bit less weaponry."

Motorola drops suit against Zafirovski, settlement could be barrier in new role

News | 11/08/2005 5:00 am EST

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