Whither Nortel? Bankruptcy Court

It was clear that Nortel Network’s situation was precarious.  Last November, the company announced a $3.41 billion quarterly loss and laid off 5% of its workforce.  On Wednesday, it and a number of its affiliates filed for bankruptcy protection, one day before it was scheduled to make an interest payment of $107 million.  The company’s affiliates in Asia, including LG Nortel, and in the Caribbean and Latin America, as well as Nortel Government Solutions (NGS) are not subject to these proceedings and will continue operations unimpeded.

As we observed back in November, the company has not caught a break since 2005, when CEO Frank Dunn was “terminated for cause” in conjunction with the discovery of his manipulation of Nortel’s financials to generate higher bonuses for himself and several colleagues.

In addition, Nortel has a decade-long history of failed and expensive acquisitions.  Their strategy, which was to buy established companies, didn’t work, largely due to an inability to integrate products from the newly-acquired entities into a common vision.  In 1998, Nortel purchased Bay Networks for $9.1 billion, quickly followed by the 1999 and 2000 acquisitions of software maker Clarify and then Alteon Web Systems for a total of $10 billion.   (The buying spree continued with Cambrian Systems for $300 million, Shasta Networks for $340 million, all the way to DiamondWare (3-D stereo conferencing) and Pingtel (SIP software) in 2008.)

Nortel’s strategy contrasts greatly with that of companies such as Cisco, which only acquired small and innovative companies at much lower cost and then successfully integrated them into the business.  It is also a stark contrast to Nortel, then Northern Telecom, in 1976 when it announced Digital World, a family of digital telecommunications products that were industry leading.  The DMS-100 became a mainstay of telephone company central offices (thanks in part to its ability to handle 100,000 subscriber lines) and the DMS product line contributed greatly to Nortel’s bottom line for 15 years.

As competition has intensified from North American, European, and low-cost Asian rivals, among them Alcatel-Lucent and Huawei Technologies, the  company’s shares sank into the penny range in recent months.  In addition, the global economic crisis has slowed spending on the gear that Nortel offers (which includes equipment for the enterprise as well as for telephone companies).

Is it too late for Nortel?  The conflation of economic conditions, competition, and scandal may remove it as an industry leader forever but it could still reinvent itself as a strong niche player while it reorganizes under Chapter 11. On the other hand, the company could break itself up and sell its main businesses to rivals. A likely acquirer (at least in my opinion) for Nortel’s enterprise unit would be Siemens Enterprise Communications, which has been in growth mode since it became a joint venture between Siemens AG and the Gores Group.  The next installment will be telling.

Jonathan B. Spira is CEO and Chief Analyst at Basex.

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