Nortel files for bankruptcy protection

Networking giant founders

Nortel Networks Corporation, Nortel Networks Ltd and some of its Canadian subsidiaries are seeking creditor protection under Canada's Companies' Creditors Arrangement Act. Some US subsidiaries, including Nortel Networks Inc. and Nortel Networks Capital Corp, have filed for Chapter 11 under the US Bankruptcy Code.

Some European subsidiaries are expected to make similar filings in Europe. Affiliates in Asia, including LG Nortel, and in the Caribbean and Latin America, as well as the Nortel Government Solutions business, are not included in these proceedings and are expected to continue to operate in the ordinary course.

Nortel says it expects day-to-day operations to continue without interruption. 

The board decided to file for bankruptcy protection as a way to deal with its cost and debt burden, and to restructure the company with a narrower scope. It had been working on the issue since late 2005, but the global economic slowdown has made he process more difficult. Nortel has $2.4 billion in cash to fund operations.  

"Nortel must be put on a sound financial footing once and for all," said Mike Zafirovski, president and CEO of Nortel. "These actions are imperative so that Nortel can build on its core strengths and become the highly focused and financially sound leader in the communications industry that its people, technology and customer relationships show it ought to be. 

"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."

The company has also asked for restrictions on trading of its stock, in order to preserve tax assets in the United States. Restrictions on trading the company's debt may follow.

Nortel Networks Ltd has negotiated a 30-day extension of a $30 million support facility provided by Export Development Canada, in exchange for rights over certain assets. 

The company also struck a deal with Flextronics, its key hardware supplier, to ensure that its supply chain will be maintained. Under the terms of the amendment, Nortel Networks Ltd NL is buying US$120 million of existing inventory by 1 July, and will make quarterly purchases of other inventory. There are also undisclosed changes to payment and pricing terms.

"It's not surprising that Nortel filed for bankruptcy protection today," said Nadine Manjaro, a senior analyst at ABI Research. "The company has not been doing well for several quarters due to declining CDMA business which was one of the company's primary business segments." 

"In addition, North America is the company's largest market and most of the major operators in this market (Sprint Nextel, Verizon Wireless, Telus, Bell Mobility, Alltel, Leap) have already deployed their third-generation mobile networks and have been planning migration to non-CDMA 4G networks such as LTE and WiMAX. 

"Nortel is not a strong vendor in either technology due to the wavering direction of its next-generation infrastructure strategy."

Two years ago, Nortel began efforts to rebuild its network business. The company was losing share and its operations were uncompetitive and costly.

"Nortel was suffering losses while the rest of the industry was solid and predictable," Manjaro added. "The firm began a transformative path aimed at improving its cost structure, operations, leadership, and overall earnings. Its strategy is to regain relevance by transforming its enterprise business, focusing on next generation mobility, convergence, and services. 

"Nortel plans to shift its portfolio to growth areas such as enterprise solutions (expected to grow 12 per cent annually through 2011), and Core/Multimedia applications, (which are expected to grow by 8 per cent annually during the same period). But perhaps its decision to shift focus came a little bit too late."

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