Nortel's Mr. Fix-It: new CEO Mike Zafirovski is a turnaround heavy-hitter

New CEO Mike Zafirovski brings hope to long-suffering Nortel investors.

Macedonian-born, U.S.-educated Mike Zafirovski has gone out of his way to demonstrate sensitivity to his newly adopted Canadian homeland. At the Oct. 17 news conference held to announce his appointment as CEO of Nortel Networks, the former Motorola president and chief operating officer carried a copy of A Little History of Canada and joked he had already read the first three chapters. Later, he talked about how much he was looking forward to getting to know Nortel “from A to zed,” stressing the Canadian pronunciation. But long-suffering investors may hope Zafirovski spends less time learning about Canadian history and more time teaching Nortel managers how to make money.

Zafirovski is supposed to take the helm of Brampton, Ont.-based Nortel in mid-November. But that may be delayed by a lawsuit, filed by his former employers at Motorola, over alleged violations of his severance agreement. That's potentially more bad news for Nortel, which has been struggling since the dramatic flame-out of CEO John Roth in 2002 and a subsequent accounting scandal that spawned class-action lawsuits, as well as criminal and regulatory investigations in both Canada and the United States. Zafirovski will replace Bill Owens, a former U.S. navy admiral, who has been applauded for his efforts over the past 19 months in pulling Nortel back from the brink.

Now Nortel needs someone to propel it forward and, despite the lawsuit, Zafirovski may just be the man for the job. Dubbed “Mr. Fix-It” or “Mike Z” by the U.S. business press, the 51-year-old executive has gained a reputation as a turnaround specialist with a hands-on approach to management gained from more than 20 years of working at industry giants such as Motorola and General Electric. He is largely credited with turning around Motorola's handset division by slashing its workforce, closing unprofitable businesses and trimming product lines. When Zafirovski left the Illinois-based communications firm in January after being passed over for the top job, he was touted as a potential CEO at other distressed firms such as auto-parts maker Delphi and Boeing.

Mr. Fix-It has his work cut out for him at Nortel, which continues to lag behind competitors such as Cisco Systems and Lucent Technologies. Improving Nortel's operating results are a top priority, Zafirovski told reporters. “We work way too hard, go through too much pain, to only have operating margin levels of low-to-mid single digits,” he said. “I cannot imagine a company with this heritage and level of investment for us to be anything less than the teens in operating margin.”

That's not going to be easy. To get an operating margin of at least 19%, Nortel would have to increase its earnings per share to 45¢US–a long way from its current EPS of about 6¢US, wrote Paras Bhargava, a BMO Nesbitt Burns analyst, in a recent note to investors. “There are many uncertainties associated with Nortel,” he added. “Lawsuits must be settled, there is likely more price competition…and last quarter's earnings quality did not impress us.”

One way to boost those margins is to review Nortel's remaining operations and start ditching the losers. After all, Zafirovski learned his management techniques at General Electric under the tutelage of Jack Welch. And at GE, the rule of thumb is: if you can't be a leader in the field, get out of the business. Nortel has already done a lot of needed cutting. At the height of its success, before the 2001 tech meltdown, the company employed more than 90,000 people; today, that number is closer to 30,000.

Once the dispute with Motorola is settled and Zafirovski officially takes over from Owens, investors will get a better idea of what he plans to do to restore Nortel's tarnished reputation and take the company to the next level. Let's hope that in addition to calling Zafirovski “Mike Zed,” Canadians can soon call him “Mr. Profitability.”