Nortel Networks will be dismantled piece by piece

The dismantling of Nortel Networks has begun.

This morning the once mighty Canadian telecommunications giant will ask to be delisted from the Toronto Stock Exchange, the conclusive sign that all of its assets are about to be carved off to competitors.

There will be no ultimate reorganization, no new business plan, no retrenching to the basics like General Motors with the hopes of rising again, no rescue by former executives. Just a bitter end to a once glorious and admired manufacturing and research leader once anchored in Brampton, Ont. and Ottawa but whose operations are now scattered around the world.

The end became inevitable after an announcement late Friday that Nokia Siemens Networks has offered to buy most of Nortel’s carrier LTE and CDMA wireless business for US$650 million. At the same time Nortel said it is in “advanced discussions’ to sell its other business units, which make Metro Ethernet and enterprise switches, and its majority share in the LG-Nortel joint venture.

Tarred by having to restate revenue for several years and riven by management hunting for those responsible, new customers were leery of signing contracts. That meant it has relied mainly for the past several years on revenue from existing customers.

The quality of its product was untouched, but nimbler competitors had moved in. When North American and European customers slashed spending last fall, competitors including Cisco Systems, and Alcatel Lucent were hurt, too. But Nortel had nothing to fall back on.

By the time Nortel filed for bankruptcy protection in January, it had lost US$7 billion since 2005, when president and CEO Mike Zafirovski was hired in what was a futile four-year salvage attempt. Its latest financial results showed a net loss of US$507 million on revenues of US$1.73 billion, down by 37 percent year over year, with declines in all segments and regions.

It didn’t have to be this way, maintains Iain Grant, managing director of the SeaBoard Group, a telecommunications consultancy.

“Nortel came out of the 2002-2003 meltdown with a viable company,” he said in a Saturday interview. “But the board destroyed the value of the company by going through a series of witch hunts over the financial irregularities. “The job of the board is to safeguard the interests of shareholders and to keep the confidence in the company,” said Grant. “They did neither and destroyed an iconic company.”

The company spent some $100 million looking into the irregularities and had to restate its financial results for three years, fired its CEO and saw a number of executive charged with a variety of offences. As the years went by revenues dropped and layoffs mounted. Some of that was due to the company’s focus on carrier CDMA technology, whereas most of the world had chosen GSM, but in hindsight the internal machinations surely affected its focus.

Consider these numbers: For the first quartet of this year none of its four business units were in the black. Carrier network revenue was down 32 per cent from the same period a year ago, enterprise solutions down 41 per cent, Metro Ethernet down 10 per cent and the LG-Nortel joint venture down 66 per cent.

The first sign that the end was near occurred in November, when another restructuring was announced. What made this one different, however, was that it was caused by an unexpected crash in carrier spending. Then came word that attempts to find a buyer for its Metro Ethernet division were going nowhere. In January the company filed for bankruptcy protection. Since then its sales have largely relied on existing customers.

The deal with Nokia Siemens Networks (NSN) for the wireless assets, arguably the most valuable parts of the company, is called a stalking-horse agreement. Because Nortel is in bankruptcy protection, any deal for the sale of assets has to be preceded by an auction to ensure shareholders are getting the best price. Presumably the NSN offer could be trumped. The tentative deal specifies that at least 2,500 employees, most of whom now work in Ottawa and Dallas, would have the opportunity to switch companies.

If approved, taxpayers would support the sale through Export Development Canada, which would give a $300 million loan commitment. Presumably that would allow the Harper government to say it is helping preserve Canadian jobs.

In a news release, NSN said that if approved the deal would enhance its strength in LTE, the so-called fourth generation wireless technology expected to see widespread deployment in 2012 by GSM carriers. In the U.S., AT&T says it wil trial LTE next year and start deploying in 2011.

With Nortel’s CDMA assets, NSN would dominate the Canadian wireless carriers as the supplier to Bell, Telus and Videotron. Presumably, it will also supply Public Mobile, the one of the new wireless entrants, which used Nortel gear in February to demonstrate the spectrum it bought is viable.

NSN was quick to collar customer support for its offer.

“As Nortel’s largest customer in Canada, Bell supports Nokia Siemens’ plan to continue to foster Nortel’s long history of research and development in Canada,” said Stephen Howe, Bell Mobility’s CTO and senior vice-president of wireless networks. ”Bringing these assets of Nortel together with Nokia Siemens Networks is good for customers like Telus and good for Canada,” said Eros Spadotto, Telus’ executive VP for technology strategy.

Bell and Telus’ existing networks are CDMA-based, but they are also building a GSM/HSPA-based parallel network which is expected to go live next year. Equipment suppliers are NSN and Huawei.

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