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Nortel Networks Files for Chapter 11
SIP Phone Systems Win BIG
January 15, 2009
Nortel Networks Corp. sought protection from creditors in the U.S. and Canada, falling victim to the economic downturn and years of struggle to turn around what was once Canada's largest company.
The Chapter 11 filing further weakened the ranks of major telecom-equipment makers and sent chills through suppliers already coping with declining sales of network gear and handsets. Phone carriers more than ever are seeking suppliers with good products and better balance sheets.
"The strong are going to get stronger," said telecom analyst Ping Zhao of CreditSights, a stock and bond research firm. Ms. Zhao gave Nortel little hope of emerging from bankruptcy. "They were already out of favor due to their weak finances, but for any of the new projects, they are definitely out of the picture" due to the filing. VoIP products are in strong positions to gain even further market share due to their abilities to provide communication solutions at such deep discounts and operating costs over traditional digital solutions.
A $107 million interest payment due Thursday may have hastened Nortel's decision to seek protection from creditors, analysts said. The Toronto-based company is entering bankruptcy court with $2.4 billion in cash to fund day-to-day operations, at a time when financing is drying up for companies reorganizing under bankruptcy protection.
Corporate bankruptcies and defaults, which experts predict will double in 2009, are striking industries ranging from retail, chemicals and autos. Falling consumer and business demand for their products are hitting at the same time payments are due on debt accumulated in recent years of easy credit. Lenders also are tightening restrictions on borrowers, making it harder for struggling companies to avoid bankruptcy.
Analysts and industry executives said at the least Nortel could be forced to shed assets at rock-bottom prices. Nortel would likely retain its corporate-networking business, where it competes against Cisco Systems Inc., the leader in the sector.
Mike Zafirovski, Nortel's chief executive, said the credit crisis swamped the company as it struggled with swings in the U.S. dollar, weak sales and rising pension costs. He said Nortel can emerge as a respected technology supplier. "We have made some technology bets to take Nortel from being a legacy company to one that can be relevant today," he said.
Once a technology star valued at $250 billion during the dot-com boom, Nortel saw its value collapse after being racked by accounting restatements, price cutting, and a merger wave that made its rivals more formidable. Nortel failed to find a merger partner, despite talks with rivals including Alcatel SA of France, Nokia Corp., and Avaya Inc., according to people familiar with the matter.
Export Development Canada, a government agency that provides credit to Canadian exporters, Wednesday agreed to provide $30 million in short-term financing. A spokeswoman for Tony Clement, Canada's minister of industry, said the agency will consider additional financing to help Nortel emerge from bankruptcy.
Trading in Nortel shares was suspended Wednesday on the New York Stock Exchange. But in premarket electronic trading, shares were off 25 cents, or 77%, to seven cents.
The company had lost half of its market value in September after disclosing plans to sell a promising business to raise cash to weather the downturn. The move, meant to restore confidence in the company's future, instead shattered it.
The bankruptcy filing means Nortel will be able to renegotiate its liabilities, which include $4.5 billion of long-term debt and pension liabilities that have increased as the value of its pension fund has declined. Nortel said subsidiaries are expected to make similar filings in Europe.
The company reported in court filings consolidated assets of $11.6 billion and liabilities of $11.8 billion.
Mr. Zafirovski, credited with earlier turning around the lighting division of General Electric Co. and the cellphone division of Motorola Inc., made progress in improving margins, and focused research dollars on promising technology bets.
But he came under criticism for failing to shrink the company fast enough. Nortel sold off a wireless technology known as UMTS that captured little market share, but continued to invest in next-generation technologies that built on it such as WiMax and LTE, believing that carriers that had moved to other suppliers would again return to Nortel. This took investment away from Nortel's strongest areas, including corporate communications networks.
Mr. Zafirovski insisted he did not ignore asset sales and mergers in favor of making Nortel's businesses more efficient, saying he worked over 18 months to execute deals. "But for many reasons those efforts haven't materialized," he said in a telephone interview.
The reorganization could now make it easier to sell assets. Many equipment makers had looked at Nortel's Metro Ethernet division. And some analysts believe bargain hunters could now return.
They said Nortel's wireless business, which has a large installed base at Verizon Wireless Inc. and Sprint Nextel Corp., could give a long-sought foothold in the U.S. to China's Huawei Technologies Inc.
"Huawei has already been winning substantial contracts around the world and this gives them the chance to go mainstream in the US," said Michael Urlocker, a telecom analyst at GMP Securities in Toronto.
Others believe that Huawei and other Chinese companies will not bid for Nortel assets because they are also suffering during the downturn.
None of Nortel's major U.S. carrier customers expect their network operations to be immediately impacted by Nortel's bankruptcy. Verizon Communications Inc. has been making contingency plans since last summer, when it was clear the equipment company's financial position was weakening, according to a person familiar with the matter. The carrier then began lining up alternative vendors, shifting projects that otherwise would have gone to Nortel.
Verizon's longer-term concern -- which is shared by other major U.S. operators -- is whether there will be enough competition among equipment providers down the road to give Verizon options and leverage in pricing discussions, the person said.
Nortel said Wednesday that it had amended pricing agreements with Flextronics International Ltd., and would buy $120 million of existing inventory by July 1 and make further purchases. The amendment is subject to Canadian court approval.