By Wojtek Dabrowski
Reuters
Friday, December 1, 2006

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TORONTO (Reuters) - For Nortel Networks Corp. investors, Friday morning may have been a little reminiscent of the tech boom.

Adrian Mastracci, fee-only portfolio manager at Vancouver’s KCM Wealth Management, says, "Whether it's C$2, or whether it's C$30, I think an institutional investor is going to want to see the fundamentals, they're going to want see the game plan, they're going to want to see that there is progress being made."

Overnight, the telecom equipment maker's share price went from about C$2.40 on the Toronto Stock Exchange to roughly C$24.

However, it was no market frenzy fueled by the promise of fat profits that was responsible for the jump. Instead, it was Nortel's 1-for-10 stock consolidation, first announced last month, that kicked in. The company now has about 433 million shares outstanding, compared with 4.3 billion previously.

Nortel has said the move will cut trading and administrative costs and aid "visibility" into its profitability. Perhaps more importantly, it expects the beefier stock price will attract institutional interest in the shares.

But market watchers say that idea simply doesn't stand up to scrutiny.

"I don't think there's much merit to that argument," says Elvis Picardo, chief market strategist.

Picardo says that while stock splits lower a share's price and can attract retail buyers, he doesn't see how a stock consolidation would attract institutional buyers.

"At the end of the day, what really matters is the fundamentals of the stock, and a share consolidation or a share split does absolutely nothing on that front," he says.

Among some analysts -- and many jilted investors -- the consensus remains that the fundamentals aren't pretty.

Regardless of their price, Nortel's shares still represent an investment in a beleaguered company that is struggling to turn itself around amid fierce competition and less than stellar profitability. Now, there is just a lot fewer of them.

Nortel was a market darling during the tech boom of the late 1990s and saw its price soar to more than C$120 in 2000. But when the bubble burst the following year, Nortel became a proxy for the woes of telecom equipment companies.

Later, an accounting scandal coupled with shareholder lawsuits also helped throttle the share price. Several years, accounting restatements and different management teams later, the stock closed at C$2.44 on Thursday.

"Whether it's C$2, or whether it's C$30, I think an institutional investor is going to want to see the fundamentals, they're going to want see the game plan, they're going to want to see that there is progress being made," says Adrian Mastracci, portfolio manager at KCM Wealth Management.

The current management team headed by Chief Executive Mike Zafirovski has won over critics by fairly clearly and repeatedly outlining a path to recovery. Still, profitability has remained elusive for the Toronto-based company.

Some institutions, like mutual funds, have in-house requirements that stipulate a company's shares must be above a certain price before the fund will commit to investing. Nortel hopes that may mean that some who wouldn't have looked at Nortel at C$2.40 may change their minds at C$24.

"Whether or not they'll be successful, I don't know," says John Kinsey, portfolio manager at Caldwell Securities in Toronto. "The odds are against them. A consolidation never seems to boost the stock."

Sure enough, the post-consolidation shares fell as low as C$23.20 on Friday, before rebounding to close at C$24.21, still down 19 Canadian cents on the session.

"Nine times out of ten, 'reverse splits' only lead to further declines. I suspect there'll be (short-selling) activity," cautions one Bay Street trader. "I think it's very hard to say that this is going to enhance institutional participation."

Nortel's argument of reducing transaction costs for investors also has some holes in it, Picardo says.

There are numerous shareholders who owned several hundred shares of the company. Someone with 600 shares, for example, now owns only 60 -- an odd lot.

"On a percentage basis, the cost for getting rid of and for trading an odd lot of shares, I would argue, is higher than the cost of trading a round lot," Picardo says.

($1=$1.14 Canadian)

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.