Nortel R.I.P.?

Death leaves a hole in Ottawa and the industry.

On June 22, Federal Industry Minister Tony Clement assembled Canada’s digital nobility. He sought counsel: the country was slipping behind in the worldwide arms race to build a new, high-tech economy.

Gathered in the Government Conference Centre’s waiting room — a noble Beaux-Arts hall in Ottawa with a ceiling that arches three-storeys high, perfectly suited to lofty goals and hot air — 180 business people, academics and lawyers spent a day discussing a sweeping array of topics, ostensibly laying the foundation for what must happen if Canada is ever going to prosper in a binary economy.

A worthy task, if way overdue. Not far away, a cornerstone of all that is high-tech in this country — indeed, the Canadian corporate colossus that helped usher in the digital era with one of the world’s first digital telephone switching systems — was crumbling.

Nortel Networks Corp. only warranted a few passing references from Canada’s technology elite, but news that the beleaguered company was selling its wireless business to rival Nokia Siemens Networks for US$650 million and giving up any hope of emerging from bankruptcy protection in some smaller, restructured form was still sinking in. CEO Mike Zafirovski had stated that the best way to maximize the value of Nortel’s businesses “is to find buyers…who can carry Nortel innovation forward.” (At press time, a possible last-ditch bid by MatlinPatterson, which specializes in private equity takeovers of distressed companies, may yet keep the Nortel name alive.)

With Nortel strategically spent, now lying prone for stalking foreign carnivores to tear it limb from limb (see sidebar opposite), there’s little to mourn. Nationalists moan about the loss of an iconic firm that was a global flag-bearer for Canadian high-tech, one that could help smaller firms access world markets. Employees lament the loss of jobs and a scandalous loss of severance and pensions. Investors grieve for a widely held stock (TSX: NT) that once soared to unprecedented heights — at its zenith, during intraday trading on July 26, 2000, Nortel had a market cap of about $366 billion, or 36.5% of the total TSE 300 index — only to suffer the ultimate shame of being delisted on June 26 after last trading at a paltry 18.5¢. And billions of R&D spending will disappear: in 2008, Nortel spent US$1.6 billion, and, according to Research Infosource Inc., which tracks R&D spending, the company has long been the leader in Canada, even as spending steadily declined from a peak of about US$4 billion in 2000.

But much of this is nostalgic. The best things Nortel offered Canada came in a different era. Some of its R&D was in China — as in so many industries, a necessity to lower costs and compete with rising Chinese firms such as Huawei Technologies and ZTE Corp. — and it had big research facilities in six other countries. Its tattered reputation, the result of an accounting scandal and financial restatements that dragged on for years, and its frayed portfolio of products made winning deals a struggle and didn’t make Nortel a good business partner.

Yes, there’s sadness and shock (if only a little), but also resignation and even relief. Nowhere are such mixed emotions more keenly felt than in Ottawa’s tech community. Although Nortel’s corporate head offices are in Toronto, the company’s Canadian heart beat near the banks of the Ottawa River at its 148-hectare (370-acre) Carling Avenue Campus. It’s a global R&D headquarters that traces a 50-year heritage to the Northern Electric Research and Development Laboratories, later Bell-Northern Research and housed Nortel’s largest concentration of employees.

As of March, during the early stages of yet another round of layoffs, Nortel’s shrunken base of 3,800 employees in Ottawa still made up the bulk of some 5,600 Canadian employees, but it was largely an R&D outpost, with many of the sales, marketing and other business functions shifting elsewhere. “A lot of the skills that Nortel could have contributed to the Ottawa tech cluster have been gone for years,” says Micheál Kelly, dean of the University of Ottawa’s Telfer School of Management, which studies regional high-tech economies. “It’s sad to see Nortel go, but I don’t think the disappearance of Nortel will have a huge negative impact on the Ottawa tech cluster.”

Once touted as Silicon Valley North, Ottawa has already changed. Foreign M&As of major tech firms such as JDS Fitel (merged with Uniphase in 1999), Newbridge Networks (bought by Alcatel in 2000) and Cognos (bought by IBM in 2008) hollowed out the region’s business acumen to some extent but also dispersed some of it to smaller firms, many of them entrepreneurial. The region employed about 79,000 people in knowledge-based companies at the end of 2008, nearly the same number as it did in the 2000 boom era, according to an annual survey by the Ottawa Centre for Research and Innovation.

But those numbers may be deceiving. Just ask Adam Chowaniec, former chairman and founding CEO of Ottawa-based Tundra Semiconductor, which was acquired in June by a larger U.S. rival, and chairman of several local startups and Ottawa’s Zarlink Semiconductor (TSX: ZL). “We’re trading on a lower dollar, and our market values are generally less than those in the U.S., even for public companies, so we’re vulnerable to acquisition,” says Chowaniec, an outspoken champion for the tech industry in Canada.

It is a matter of financial scale: from risk and venture cap levels right through to public stock markets and government incentives, the tech industry lacks the wherewithal to grow and compete globally. “No matter what happens and who picks up Nortel’s pieces, they’re just going to be R&D branch plants in the end,” says Chowaniec. “And yet, the thing that we’re missing the most is growing companies that will train people on the business side, the sales, marketing, risk finance. Every time we lose a company, whether it’s Nortel or Tundra, we’re cutting our ability to grow our own clusters.”

There’s certainly some promise. In Ottawa, there are several smaller companies hatched out of the Terry Matthews tech nursery — Bridgewater Systems (TSX: BWC), DragonWave (TSX: DWI), Mitel Networks — each of which is run by execs with Nortel on their resumés. None has the size and scope of Nortel, and perhaps the fact that Canada has so little to replace it is the greatest tragedy of the company’s passing.