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Nortel to Die, Firms Hover for Parts

TMCnews Featured Article


June 22, 2009

Nortel to Die, Firms Hover for Parts

By Brendan B. Read, Senior Contributing Editor


Nortel (News - Alert), the storied Canadian telecommunications equipment firm, appears to be on its deathbed, with other firms waiting to harvest its most functional body parts during its swan song.

 
The Associated Press reported today that the firm is winding down and said it is in talks to sell the rest of its operations. Nortel CEO Mike Zafirovski said the enterprise, the optical Metro Internet, and the carrier voice over IP and application business, as well as part of the wireless business are among the assets still up for sale. TMCnet reported that Nokia Siemens (News - Alert) Networks is buying substantially all of its CDMA business and LTE Access for $650 million.
 
Citing the Nokia (News - Alert) Siemens sale, the Toronto Stock Exchange suspended trading in Nortel shares June 22 reports the Canadian Press. The wire service said that Nortel has been the TSX’s most valuable company during the high tech boom. At its peak it employed more than 90,000 people worldwide and its shares were worth the equivalent of $1,245 in July 2000, or $124.50 before a 10-for-one stock consolidation.
 
The company has been operating under court protection from creditors since January had a stock-market value of just $93 million on Friday when its shares closed at 18.5 cents.
 
Zafirovski had hoped to restructure and preserve Nortel since seeking bankruptcy protection in Canada and the United States, but he said the economic crisis changed the outlook dramatically, said the AP. Nortel became the first major technology company to seek bankruptcy protection in this global downturn.
 
The chief said he’s hopeful the remaining transactions will allow employees to join new companies.
 
“We’re in advanced discussions with anywhere from three to seven companies for each one of the assets,” he said in an interview. “If we’re successful in getting the right value and the right integration planning and so on then Nortel as an entity which we know it will no longer be here in the future.”
 
The federal government is helping Nokia Siemens make the transition, and in turn Nortel to cross over. The Ottawa Citizen, the Canadian capital’s major newspaper in whose western suburbs that Nortel once had a huge office campus, reported Saturday that Export Development Canada “will help finance the break-up of Nortel Networks with $300 million in loan guarantees. The move is ironic, as Nortel failed to get financing from the Conservative government late last year in a bid to avoid filing for bankruptcy protection Jan. 14.”
 
The EDC, said the story, has been a vital financing lifeline to Nortel in recent years as other lenders fled as its fortunes fell, but it appears to have had second thoughts about the prospects for Nortel survival as an independent entity.
 
Nokia Siemens will hire 2,500 Nortel wireless research employees, a majority of the wireless research teams in Ottawa, Dallas, Mexico and China. Nortel has close to 1,000 wireless employees in Ottawa.
 
Nortel’s business acumen is being challenged even as it goes through its death rattles, the last act of what can be seen a chronic case of poor decision-making that had led it to the present fate. These include accounting scandals and technology missteps i.e. keeping CDMA when many providers decided to follow the European wireless communication standard GSM reported the CBC earlier this year.
 
Writing for TMCnet, Ronald Gruia, Programs Leader and Principal Analyst at Frost & Sullivan, said Friday that Nortel’s enterprise division is widely expected to be sold within the next week or so. Potential suitors include Siemens Enterprise Communications (News - Alert) and Avaya.
 
“The deal does raise quite a few questions, including the issue of valuation,” said Gruia. ”Perhaps Nortel’s leadership outplayed its hand, holding out in hopes the company would get a better valuation for their assets. The $650 million represents a smaller value than some pundits expected Nortel to get, which might also impact the sale of other units, including its Enterprise, Metro Ethernet Networks, global services, and carrier infrastructure (media gateway and MSS multiservice switch product lines) businesses.
 
“Given the price of the wireless sale to NSN, the valuation of the enterprise business unit is not expected to reach $500 million, which represents a drop of over 50 percent of the valuation that it would have gotten last year before the downturn that precipitated the downfall of Nortel.”
 
James Bagnall, writing Sunday June 21 for The Ottawa Citizen said that the firm could generate from the selloff proceeds of $2 billion U.S. plus, including the Nokia Siemens deal. Yet the company’s liabilities as of March 31 exceeded its assets by $3.6 billion U.S. Unsecured creditors – including pensioners, suppliers and employees owed severance pay – will have to accept only a portion of the money owed to them.
 
Yet there are no guarantees that more buyers will actually emerge or that Nortel will get $2 billion U.S. Most of Nortel’s product lines he said “are no longer world beaters”. At the same time Nortel has been losing business because it had entered creditor protection; customers want a supplier that is going to be around. Nortel’s accounting and business unit structure: three dozen different accounting systems and the intermingling of business units, plus the elimination of its global services units created confusion for potential buyers.
 
All of these factors appear to set up what other observers call a death watch. Where Nortel’s competitors could sit back, and watch the company die.
 
Bagnall cited Verizon Wireless, which in February awarded its next-generation LTE wireless technology contract to Ericsson of Sweden and Alcatel-Lucent (News - Alert). Nortel should have been a shoe-in, he pointed out. Its LTE technology was first-rate and it was a long-time supplier of CDMA gear to Verizon Wireless. But the wireless carrier rejected Nortel’s bid out of concern for risk; Nortel might not be around in a year or two to service the contract.
 
“It’s a good bet that Verizon Wireless encouraged Nokia Siemens to buy Nortel’s CDMA and LTE businesses. This would give the carrier some assurance its already-installed Nortel gear will be looked after. The arrangement also gives Nokia Siemens an entrée to the U.S., a market it has had trouble breaking into.
 
“Indeed, that’s why the Finnish-German group is willing to pay as much as it is for the Nortel assets. But, even here, Nortel paid a penalty for delaying. A couple of months ago, Nokia-Siemens was prepared to pay $850 million. By June, Zafirovski – not to mention the committee of creditors that now controls Nortel’s destiny – was getting desperate to generate a sale. The price came down.
 
“Perhaps even more painful for Zafirovski was the role played by Susan Spradley, the head of Nokia Siemens’ operations in North America, and a former senior Nortel executive. Shortly after Zafirovski was hired as Nortel’s CEO, Spradley reportedly told her new boss that his game plan – which involved trying to restore Nortel to its former greatness rather than narrow its focus – was bound to end in ruin. She was right. Her new firm is now taking advantage.”
 

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Brendan B. Read is TMCnet’s Senior Contributing Editor. To read more of Brendan’s articles, please visit his columnist page.

Edited by Michael Dinan







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