Intangible Assets Plus Hard Numbers Equals Soft Finance

His preferred strategy: a full-tilt push to acquire the intangible assets that will put Nortel at the head of the pack. Last year alone, Buechner engineered four outright acquisitions and bought a minority stake in seven other companies. The biggest acquisition: Bay Networks, which Nortel bought for $6.9 billion. In the wake of that shopping spree, Buechner has thought a lot about what creates value and, in turn, what Nortel should pay for it.

"The value in Nortel is in the marketing, the techology, the R&D, and the solutions that we can provide for our customers," he says. Hard assets -- physical plant and manufacturing equipment -- count for much less these days. Instead, one of the largest sources of value is the pool of ideas floating outside of the organization. In a world where companies compete on ideas, it's not enough to look in-house; very often, the best minds reside elsewhere.

To illustrate this point, Buechner offers the example of Aptis Communications, a startup based in Chelmsford, Massachusetts. Aptis was founded in January 1997, when three engineers left Shiva Corp. to start their own company. Shiva makes remote-access servers for companies; Aptis began designing servers for telecom suppliers and developed an access switch that was capable of handling nearly three times as many dial-ins as the then-highest-volume modem on the market. Nortel's Web-tone strategy made Aptis an appetizing acquisition target.

The question for Buechner: What was the value of Aptis? One rule of thumb that Buechner knew comes from John Chambers, CEO of Cisco Systems (an arch competitor of Nortel), who says that an acquisition is worth $2 million per engineer. Aptis had 40 engineers and no shippable product. Was it really worth $80 million?

Speed Counts

Just a few years ago, neither Buechner nor anyone else at Nortel paid much attention to the valuation of startups. The company designed products using its own corps of thousands of engineers. But Buechner and Nortel CEO John Roth concluded that small companies that were built to move quickly might pass Nortel in the Web-tone technology race. So Roth charged Buechner with carrying out a plan to pick up Nortel's pace by using technology from outside the company.

Buechner was well prepared to take on this challenge. Born in Freiburg, Germany, he immigrated to Canada with his parents when he was eight years old. He attended college at Carleton University in Ottawa, Ontario, where he earned an electrical-engineering degree. In 1975, he became Nortel's youngest-ever director of marketing. He then went on to hold other high-level positions at the company -- including group vice president of Bell-Northern Research Inc., and managing director of Nortel's German subsidiary.

But it was while doing a stint as group vice president of Nortel's data-communications business that he learned the value of intangibles. In 1994, when Buechner took over that division, the data market was growing fast. (In fact, data traffic has since surpassed voice traffic on the world's telecom networks.) But revenues from the datacom business were falling, and earnings were stalled.

Buechner zeroed in on the problem: In an industry where speed counts, Nortel's research-and-development operation was bogged down. "We had too many engineers who were just trying to optimize the R&D," he says. "They didn't have a sense of what would make the business fly, and so we were in a start-stop mode." Engineers kept reworking products every three or four months -- which prevented them from getting to market. The result: no product, and R&D costs that shot through the roof.

To solve the problem, Buechner worked with engineers to refocus their efforts on product delivery. For one product line, he created two distinct development streams. In the first stream, engineers made incremental improvements to existing products. In the second, they developed the company's next generation of products.

Almost immediately, Buechner's approach proved the value of speed: Getting each product out fast pumped up sales. Within three years, revenues shot up from $250 million to $800 million. According to Buechner, 90% of those revenues came from small advances that sped improvements to market. At the same time, the company worked on developing future breakthroughs. Being first, Buechner says, brings huge benefits, even if "first" isn't your absolute best.