Nortel files for bankruptcy, local operations unaffected

Thursday, 15 January, 2009

On the cards for some time now after restructure after restructure, Nortel, North America’s biggest maker of telephone equipment, in business for 113 years, filed for bankruptcy protection late last night (EST). The filing came a day before Nortel was due to make a debt payment of $107 million.

The stock fell 69% to 12 cents by 4:15 pm in trading yesterday on the Toronto Stock Exchange, for a market value of CA$60 million (AU$48 million).

At its peak in 2000, Nortel had annual revenue of $28 billion and employed about 93,000 people in more than 150 countries. The stock traded as high as CA$1,245, adjusting for stock splits, for a market value of CA$366 billion, making it the biggest company in Canada. The shares quadrupled in 1999 on expectations the Toronto-based phone equipment maker would benefit from the surge in demand for internet-based technology.

Nortel accounted for 37% of the Toronto Stock Exchange 300 Composite Index, as it was called then. That created a problem for Canadian mutual fund managers, since Canadian law bars mutual funds from holding more than 10% of assets in any one stock.

Mark Fioretto, Vice President Enterprise, Asia South Pacific, Nortel, commented on the ANZ operations.

“It's business as usual in Australia and Nortel remains committed to its partners and customers in the region. The bankruptcy protection covers the US, Canada and Europe, and is designed to allow Nortel to restructure and find a sound financial footing once and for all, and once more the move was made now, with more than $2 billion in cash reserves, so Nortel remains liquid and fully operational.”

Expanding further on the impact for Australia, Fioretto said, “Our affiliates across Asia–Pacific, including Australia, are not included in the Chapter 11 and CCAA Creditor Protection proceedings and are expected to continue to operate as normal. We remain fully committed to supporting our customers and partners in Australia and around the world through this process. No announcements were made today regarding strategy. The process announced today is designed to translate our improved operational efficiency, double-digit productivity, focused R&D and technology leadership globally into long-term success.”

And for those wondering about job cuts, Fioretto said, “There were no specific announcements made regarding jobs as part of today’s announcement. Nortel’s day-to-day operations globally are expected to continue without interruption.”

Nortel’s decision, following the takeovers of Canadian firms such as aluminum maker Alcan and miner Falconbridge, means another Canada-based global leader is about to disappear, according to Louis Hébert, a professor of management strategy at the HEC Montreal business school.

In the tech market the only real global industry leader left is Research In Motion (RIM), maker of the BlackBerry email phone. RIM, coincidentally, is going from strength to strength and will open an office in Sydney on 3 February this year.

Founded in 1895, Nortel — then called Northern Electric and Manufacturing — supplied telecommunications equipment to Canada’s nascent telephone system. It built Canada’s first dial equipment for a brewery in Montreal, according to the company’s website.

The equipment maker later changed its name to Northern Telecom Ltd to reflect a focus on telecommunications, and rebranded itself as Nortel Networks in 1999 after searching for a more internet-like moniker.

Nortel’s growth during the internet mania of the late 1990s may have been an illusion. The company restated earnings going back to 1999 after probes by regulators in 2004 indicated executives incorrectly booked revenue, inflating sales figures by $3.4 billion.

Nortel paid a $35 million fine in 2007 to settle US Securities and Exchange Commission claims that it defrauded investors by manipulating earnings from 2000 to 2003. The company didn’t admit or deny wrongdoing.

Investors blame Nortel management for overpaying for transactions such as the $6.9 billion purchase of Bay Networks in 1999 and the $5.7 billion acquisition of Alteon Websystems a year later.

Canadian Industry Minister Tony Clement said the government is willing to help Nortel restructure as a viable company by providing up to $24 million in short-term financing and is open to discussing other loans.

Even so, analysts were pessimistic about Nortel's prospects.

Lisa Pierce, an analyst with Forrester Research, said Wednesday that Nortel now can expect to lose more business to competitors like Cisco Systems and China's Huawei Technologies, which already have been gaining share.

Bloomberg & Associated Press Wire Services and Merri Mack

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