Nortel Chapter 11 means radical change in the equipment sector

Nortel Chapter 11 means radical change in the equipment sector

Dana Cooperson, Matt Walker/Ovum  |   January 19, 2009

On 14 January 2009, Nortel Networks moved beyond talk of divestiture and speculation of bankruptcy and filed for creditor protection in Canada and the US. Nortel UK entered 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 downward 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 "Ëœfor 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.

This harsh market will expose companies with ailing balance sheets and put their survivability at risk. As during the "dotbomb" of 2002-03, issues of cash burn rates and leverage ratios now matter more than speeds and feeds and technology roadmaps. Debt restructuring can give struggling companies breathing room to radically change and return in a different form or make their businesses more attractive for acquisition.

"The new Nortel" may be unrecognizable as a result of business/product-line shutdowns and asset sales, leaving opportunities for other vendors

One of Nortel's perpetual struggles - going back to the 1998 acquisition of Bay Networks - has been in integrating acquired assets effectively, and more broadly fostering collaboration across divisions. Multiple attempts at top-down restructuring have failed to break down Nortel's silos and create a sustainable cost base; top-line change did not always filter down into product design or cost structure.

Prior to last 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.

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