Wednesday, January 14, 2009

Bye bye Nortel

Once North America’s 2nd largest telecom equipment maker, Ontario-based Nortel Networks Corp. filed for bankruptcy this morning. The expectation is that the company will be sold off in pieces to the highest bidder.

Apparently the proximate cause was a (US) $107m interest payment due tomorrow. Another factor was today’s expiration of a 30-day waiver granted by Export Development Canada on a (US) $750m line of credit — a waiver necessary to use the line of credit after Moody’s downgraded Nortel debt to junk bond status. In its bankruptcy filing, Nortel reported that it owes $187m on that line of credit.

While all B2B firms are facing cutbacks on capital goods orders, Nortel had a particularly bad 2008. Its shares fell more than 95% in 2008 and it was facing delisting on the NYSE. Its September plan to sell off the two units with the highest potential growth — Metro Ethernet and its 4G (LTE) operations — were said to have rattled buyers worried about the longterm viability of the associated product lines.

My guess is that buyers of multimillion dollar infrastructure were spooked because they can read the papers: Nortel has lost nearly $7 billion in the three years that Mike Zafirovski has been CEO. Nortel’s 2006 decision to sell its W-CDMA base station operations to Alcatel was also not a sign of strength for a company that claims to be serious about LTE, the 4G successor to W-CDMA.

In happier times, I would expect that Motorola would be interested in Nortel’s operations, but this is also looming as a bad week for Motorola as well.. Zafirovski is former COO and President at Motorola, and so would know many of the key players there. Motorola’s 4G wireless base station operations are too small for it to make the top ranks of LTE vendors. Motorola and Nortel had a brief (CDMA) infrastructure joint venture in the early 1990s, and back in 2002 there was speculation about some form of combination.

One thing is clear: the death of the 113-year-old former Western Electric subsidiary will be a major blow to Canadian national pride. The company has consistently been the country’s largest R&D spender — still 6x as big as Research in Motion — although increasingly that R&D has been sent offshore to China and other foreign subsidiaries.

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