Nortel riding Wall Street wave

SANTA CLARA, California--Nortel Networks chief John Roth seems out of place in Silicon Valley: He's a "no frills" executive in a place where fortunes are made and lost over a plate of sushi.

But in the networking equipment industry's acquisition arms race, the leader of Canada-based Nortel may have fired the first and most successful salvo of last year when he purchased Bay Networks, one in a series of moves.

The goal? Win the battle to convert networks based on technology for carrying voice calls to a hybrid layout capable of handling the voice and Internet-based needs of communications carriers and Net service providers, or ISPs.

Wall Street seems to like Nortel's chances, as evidenced by the company's current stock valuation--near an all-time high.

A Reuters report this week had raised concerns about delays in the company's shipment of equipment this spring. But the company downplayed the account.

"Strength of growth continues to put challenges on the supply of components, which is a market condition across the industry," said Frank Dunn, Nortel's chief financial officer, in a statement. "This condition was anticipated in our expectations for the second quarter."

Nortel reports earnings for its fiscal second quarter July 27.

Roth sat down with CNET News.com to discuss his company's momentum, the departure of former Bay Networks chief David House, and the changing dynamics at work in the networking industry.

David House's departure: What is that indicative of?
It's really indicative that the acquisition is done--the merger is complete. When we started merging the data organization and the voice organization for enterprise groups together, we merged them under [enterprise solutions business unit president] Jim Long, as opposed to Dave. And as that moved ahead it was pretty clear that Dave was working himself out of a job. So it's come to an orderly conclusion. It's really symbolic of the fact that Dave's work is finished within Nortel.

Competitor Lucent Technologies completed its $24 billion acquisition of Ascend Communications last week. How do you view the ongoing battle between yourselves, Lucent, and Cisco?
There's a lot of business out there. This is a big market. The telecom industry itself is an industry with $274 billion in purchases each year and I think what we've seen happen is the vendors that are best prepared to service the requirements going forward are the three you just mentioned--Nortel and the other two.

Roth on voice/data conundrum

So really it's coming down to three companies who seem to be best positioned now to take carriers from the current world of a network that's based on handling voice, toward the future, which is going to be based on handling voice and data. Our drive is to make sure we meet the requirements of these kinds of networks. There's no question they're going to be handling huge volumes of Internet protocol traffic, which goes beyond just Internet use.

Do the trends in networking translate in the current value of your stock, which is near a new peak?
I think the portfolio that Nortel has assembled--the leadership we have in optical systems, very strong position in wireless, great position in the enterprise, and a very strong portfolio of ATM [asynchronous transfer mode] switches for the edge and the core of the network--does [:reflect in our stock pirce]. We've brought out a portfolio of routing products for carriers: Our Verselar 25000 is a product that's in the same class as Juniper's--which recently went IPO--and that's our first entry in this area. You'll see more from Nortel in the future.

Is Nortel at a disadvantage being headquartered in Canada?
We're certainly not as visible in the U.S. as if we were a U.S.-based company. It is thought of as a Canadian firm even though 56 percent of our

Roth on culture clash

revenues now are in the U.S. and only 7 percent of our revenues now are from Canada and the bulk of our employees now are in the U.S. Nortel has become, for all intents and purposes, a very U.S.-centric company. During the past couple of years, we've grown most rapidly in the US market.

As a veteran, has the networking industry evolved as you expected?
I took over as CEO in the fall of 1997. It was announced in April of 1997--and I found myself thinking over the summer of that year about what going to happen to the industry and where the company was going to go next and that's when I came to the conclusion that the IP prototol was going to sweep the industry. So in the fall of 1997, that's when I laid out the direction for Nortel and we've been pretty well following through on that. The acquistion of Bay last summer was major a step in that direction.

It's moved very quickly. I decided we had to move fast and I'm very pleased we've moved as fast as we have. We did our deal with Bay about this time last year and Lucent just closed theirs. So we're a year ahead, and a year ahead in this business is four Web years by my reckoning. That's a long time.