Friday, January 16, 2009

Nortel Files for Creditor Protection

On 14 January 2009, Nortel Networks filed for creditor protection in Canada and the US, with Nortel UK entering administration separately under a filing managed by Ernst & Young. The company reached this point after multiple management regimes failed in their attempts to remake the company after the bursting of the telecoms bubble. Nortel’s move may result in a more balanced industry structure for communications equipment.

There is no immediate industry impact from this filing, as Nortel’s downwards spiral has been gradual and bankruptcy restructurings take time. For Nortel’s three key constituencies – customers, investors, and staff – the announcement reinforces but does not fundamentally change earlier concerns. The latest phase in the Nortel saga began four months ago, when it pre-announced 3Q08 earnings (guiding down expectations), publicly put a ‘for sale’ sign on its Metro Ethernet Networks (MEN) division, and then mapped out yet another reorganization. At the time we stated that a more radical approach than divestiture was needed to cure the company’s woes. The bankruptcy filing is radical, but it will be exploited by competitors. They are now in a strong position to remind customers that Nortel can no longer give assurances of continued development of any specific products, which will surely impede Nortel’s ability to bring in new business.

Prior to this week’s filing, Nortel was in the midst of moving from four to three business units by folding bits and pieces of its Services division into the respective MEN, Enterprise Solutions, and Carrier Networks business units. The aim was to create three standalone operations with a more focused set of offerings and resources. Some elements of this restructuring are undoubtedly positive; for instance, rationalization of the Enterprise product line and phasing out some legacy technologies. However, this change follows numerous incremental divestitures or shutdowns of specific businesses and product lines (for example, broadband access and the UMTS and WiMAX RAN segments) in an attempt to focus and differentiate while cutting costs. By entering bankruptcy protection, Nortel’s fate will now be largely determined by its creditors and the courts. Hence the restructuring ahead will be much more brutal and less under Nortel’s control: product lines, technologies, partnerships, divisions, and even customers (i.e. installed base) will be candidates for shutdown or sale to the highest bidder.

Evolution to 4G. Nortel’s mobile infrastructure business is now focused on LTE/SAE (long term evolution/system architecture evolution). It is working hard to develop a strong LTE/SAE ecosystem including LG Electronics, LG Nortel, and other partners. It is doing its best to demonstrate its capabilities through trials (e.g. Verizon and T-Mobile Germany) and announcements (e.g. a deal with KDDI) and expects some commercial launches in 2009. Its LTE assets (part of the Carrier division) may be attractive for another player, perhaps Alcatel-Lucent, NEC, or ZTE.
There may also be some ‘rediscovered jewels’ from the recent acquisitions that became lost in the Nortel shuffle (e.g. Tasman) and may be of specific interest to some acquirers. Nortel emphasizes that its decision to file now – when its cash reserve is $2.6 billion – rather than 6–12 months down the line gives it added flexibility. That may be so, and may allow it to re-emerge as a smaller, better version of itself in the future. However, the scenarios mapped out above, in which rivals use Nortel’s bankruptcy filing as a chance to reshuffle the supplier landscape dramatically to their benefit, seem more likely. While public credit markets are tight and investors cautious, more aggressive capital sitting on the sidelines may also see this as an opportunity too ripe to pass up.

With thanks to - Dana Cooperson and Matt Walker, analysts at Ovum and Maria Di Martino , European PR Executive

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