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Nortel Saga Ends with Chapter 11
[January 14, 2009]

Nortel Saga Ends with Chapter 11

Group Managing Editor
The communications industry has certainly seen its share of consolidation — either by choice or out of necessity — in the past year.  But now, North America’s largest telecom equipment vendor is on the brink of becoming the latest casualty of a sinister combination of an economic recession and a trend toward software-based communications.  Canadian firm Nortel is reportedly filing for bankrupty protection.  TMCnet president Rich Tehrani (News - Alert) will have more, straight from the proverbial horse’s mouth, after a call with Nortel today.

The reports come as $103 million in interest debts comes due this week, and despite having more than enough capital on hand to cover those current debts, the issue is more far-reaching.  Not only is the economy playing against Nortel (News - Alert) — as it is against most other vendors as well — but it is also seeing increased competition from rivals, including Alcatel-Lucent with its new leadership, and Huawei Technologies, which is increasingly looking to expand its global presence.

Furthermore, despite the continued growth of the telecom industry, the innovation spurred by new technologies has also created more of a focus on software-based communications services, which has the Software as a Service (SaaS (News - Alert)) space booming.  It is a natural progression as businesses increasingly look to cut costs and reduce infrastructure costs, unfortunately for those vendors that rely on equipment sales.
Thus, while it may have the cash to cover the debts now due, Duncan Stewart, analyst at DSAM Consulting explains that the bigger issue is the future.  “The issue is not whether or not they can pay it. … It’s the idea of: if you know you're eventually going to default anyway, why not do it now and keep the ... interest payments you would have shelled out?” he said, according to a Reuters report.
Nortel shares, which, at their peak, traded at more $800 (more than C$1,200), but closed yesterday at 38.5 cents on the Toronto Stock Exchange.  It received a delisting warning from the New York Stock Exchange last month, when its shares fell below the minimum listing threshold of $1.  The company lost $3.41 billion in Q3 2008, after realizing a $27 million profit in the previous year, and has cut staff from 95,000 in 2000 to about 26,000 currently.
This is in perhaps the prelude to an inauspicious end to what was formerly the most prominent telecom equipment business in the world, and as TMC’s (News - Alert) Greg Galitzine notes, “The vultures will all be out today, slamming the company's management, pointing to the series of accounting scandals that ultimately doomed this company.”
And he is likely correct — this is a high-profile happening in a high-profile industry – but he also accurately points out that “Nortel still has some great technology, and a customer base and service contracts that will have the scavengers salivating.”  That technology will not go by the wayside, and those customers, while likely having to deal with some sort of transition, will also not be lost in the mix.  The industry Nortel has helped build will live on, and its product portfolio and knowledge base will find a home with other vendors that will continue its legacy, albeit under a new brand.
Common thinking suggests that bankruptcy might be the best solution for Nortel at this stage in the game, and that it will likely be broken up and sold piecemeal to competitors. Its four divisions — Carrier Networks, Solutions, Global Services, and Metro Ethernet — would make notable additions to several companies, like Radware, which is already said to be interested in buying the Metro Ethernet division.
As this situation plays out, its impact on the communications industry will extend well into the future.  To find out how and to hear from the industry insiders that will play a role in it all, don’t miss your chance to continue this conversation in Miami, February 2-4, at INTERNET TELEPHONY Conference & EXPO.  This will be the first, and the biggest gathering of the communications industry as the Nortel saga likely comes to a close.

Erik Linask (News - Alert) is Group Managing Editor of TMCnet, which brings news and compelling feature articles, podcasts, and videos to nearly 3,000,000 visitors each month. To see more of his articles, please visit his columnist page.

Edited by Erik Linask

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