Nortel: Collapse of a giant

Once-proud Canadian standard-bearer reaches bottom, considers next steps.

Nortel Networks’ (TSX: NT) 114-year history entered a new era Wednesday, as company lawyers filed for bankruptcy protection in courtrooms in Toronto and Wilmington, Del.

The company’s board of directors decided to make the move at a meeting Tuesday evening, in advance of a $107-million debt repayment that was due Thursday. With its operations burning through some US$250 million of its cash last quarter — the news release announcing the restructuring stated it had US$2.4 billion in cash as of Dec. 31, which is down from US$2.65 billion as of Sept. 30 — Nortel chose to preserve its funds and proactively reorganize financially while it can still continue to operate.

“This process will allow Nortel to deal decisively with its cost and debt burden, to effectively restructure its operations and to narrow its strategic focus in an effective and timely manner,” the company said in a statement.

The news, although expected, still left industry watchers incredulous as to the collapse of what was once Canada’s technology standard-bearer. At its height, in the summer of 2000, riding high through the high-tech and telecom booms, Nortel was worth about $385 billion. The stock’s all-time high on the TSX was $1245 (accounting for 10-for-one stock consolidation in late 2006). On Wednesday, Nortel shares traded as low as 8 cents when trading resumed on the TSX at 11 a.m., before rebounding by the afternoon to about 13 cents a share, with a market capitalization of just under $65 million.

The Toronto stock exchange is undertaking an expedited review of whether the company still meets listing requirements. The New York Stock Exchange notified the company in December it could be delisted.

Nortel has lurched from one crisis to another this decade. Hit hard by the collapse of the telecom and Internet tech bubbles of 2000-2001, Nortel then played host to an accounting scandal that led to a series of financial restatements. (Legal proceedings involving several former executives who were fired for cause in 2004, including CEO Frank Dunn, are still ongoing.)

Current CEO Mike Zafirovski, who joined Nortel in November 2005 after successfully restructuring Motorola (NYSE: MOT) earlier this decade, was supposed to turn it all around. But competitive industry conditions, including the emergence of new low-cost telecom equipment manufacturers like China’s Huawei, and gaps in Nortel’s own technology portfolio made the comeback an even steeper challenge than initially expected.

And then came the credit crisis. As the company noted in a statement Wednesday, “The global financial crisis and recession have compounded Nortel’s financial challenges and directly impacted its ability to complete this transformation.”

Even attempts to sell its promising optical networking division have so far failed, and another round of 1,300 layoff was announced in November.

Today, its workforce is about 75% smaller than it was in 2000; some 4,600 employees still work at its Ottawa campus, a small portion of the more than 20,000 eight years ago.

The bankruptcy protection is a last-ditch effort by Zafirovski to save something of the company. “Nortel must be put on a sound financial footing once and for all,” he said in a statement. “I am confident that the actions we’re announcing today will be the fastest, most effective means to translate our improved operational efficiency, double-digit productivity, focused R&D and technology leadership into long-term success.”

It is hard to know just what Nortel will be as a company when, or if, it emerges from bankruptcy protection. Much depends on what divisions or assets it is able to sell and at what price, and to what extent it can restructure its debt.

“It’s certainly possible a chunk of Nortel could emerge from this restructured, properly financed and a completely legitimate technology player, just in a subset of what Nortel does today,” says Duncan Stewart of DSAM Consulting, a technology industry research firm. He expects that both the optical networking and its telecom carrier equipment businesses will be sold off, leaving a business focused on corporate communications equipment — a distant No. 2 competitor to Cisco Systems (NASDAQ: CSCO).