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The Rise and Fall of Nortel

1. Keeping in mind ethical concerns, describe the factors that contributed to Nortel's failure.

2. What mechanisms should be enforced to better align managers with the interests of shareholders?

3. Would you describe the meltdown of Nortel more as a failure of "people" or of "capital market processes"?

4. Nortel's fate is similar to what happened to WorldCom and Enron in the early 2000s, and to Lehman Brothers, Citigroup, and other banks during the 2008 financial crisis. Why and how does the banking industry commit the same mistake over and over again?

5. Discuss methods to prioritize the following remedies to stop such recurrences: business education, regulation of accounting/financial markets, regulation of incentives, or regulation of punishment. How did you prioritize these remedies?

Solution Preview

1. From an ethical perspective, the primary factor that was responsible for the rise and fall of Nortel was overvaluation, which happens when a company overstates share prices to lure potential investors to the company. The overvaluation engaged in by Nortel was the catalyst for a series of irreversible events leading to the doom of Nortel. The company attempted to deceive investors by utilizing the discrepancy between actual value of the share and the market value of the share to raise market value of their company and by raising potential investors' expectations. Therefore, Nortel's market value increased because of the inaccurate and deceitful strong future prospects and profit potential for the company created by the use of overvaluation. As a result of the deception used by Nortel, investors began to buy into the company greatly increasing the market value of the shares.

But when Nortel failed to deliver on its expectations, it started to create suspicion among its investors with share price declining. As a result of this, managers started to take drastic measures thinking it might stable the ...

Solution Summary

This library response looks at the meltdown of Nortel.