Nortel can still have a bright future

Following the collapse of Canadian communications giant Nortel, analysts have been busily assessing just what went wrong and what lies ahead.

Following the collapse of Canadian communications giant Nortel, analysts have been busily assessing just what went wrong and what lies ahead.

It is widely agreed that the rot set in years ago. Back in 2000 Nortel was in clover with a massive market cap that accounted for more than a third of the total value of the Toronto Stock Exchange.

But the era was the beginning of the end; Nortel overspent on acquisitions when times were good and was left bloated and over-manned when the party ended. Agile rivals executed better recovery strategies, among them modern-day networking kingpin Cisco, and left Nortel bumbling along behind.

A savage round of job-cuts and restructuring kept the wolf from the door that time, and Nortel made a profit again in 2004, but that same year it became embroiled in an accounting scandal and criminal investigations against key executives soon followed.

In 2005 Nortel hired ex-Motorola trouble-shooter Mike Zafirovski to turn it around, but despite more aggressive restructuring and job cuts, it fell victim to slowing demand for its kit as the downturn took hold last year, and cheap competition from up-and-coming competitors such as Huawei eroded its market share.

ABI Research senior analyst Nadine Manjaro believes Nortel was hobbled by a hazy technology strategy, lagging in key areas such as Wimax. She acknowledges it was doing what it could to change, but said, "Perhaps its decision to shift focus came a little bit too late."

Who will buy?

Nortel was a true communications veteran with a pedigree going back to the days of the first phone systems in the 1800s; as such it engendered fierce loyalty over the years. 

Its position as a much-loved Canadian business will doubtless come into play. There is certainly enough attachment to Nortel at large that the Canadians will want to keep it going if possible. The best way to ensure this outcome is to sell it.

Ovum analysts Dana Cooperson and Matt Walker say there is a chance that filing for protection now, while it has $2.6bn in the bank, will help Nortel return slimmer and better in a few months. But, they warn, it is more likely that others will step in to redraw the market landscape.

"While public credit markets are tight and investors cautious, more aggressive capital may see this as an opportunity too ripe to pass up," says Ovum.

So is anyone in the frame? Few Canadian firms would be willing to buy outright, so the rescuer would probably be American or Chinese. 

Under Canadian law Ottawa can block foreign takeovers valued at more than $250m, but it has never exercised this right, so it is difficult to second-guess what it will do.

Nortel's tastier assets will probably be sold piecemeal and Cooperson and Walker at Ovum predict Nortel's competitors will be thinking along several different lines.

"Competitors are in a strong position to remind customers that Nortel can no longer give assurances of continued development of specific products, which will impede Nortel's ability to gain new business," they say.

"For a company targeting Cisco, bits and pieces of Nortel's Enterprise and Metro Ethernet Network units are attractive. Juniper, Tellabs and Ciena would benefit from looking carefully. All have some experience and growth through mergers and acquisitions, and have geographic and cultural similarities."

A competitor keen to cut its research and development, spend and grow its customer base would be interested in the Metro Ethernet Network business, according to Ovum, which says Nortel has done a good job of talking up this part of its business, even though it failed to find a buyer.

Other firms may be interested in filling out their portfolios. Cooperson and Walker name Ericsson, which rescued Marconi after it went down in 2005, as a contender. Ericsson and Nokia Siemens both have gaps in their line-up and small enterprise businesses.

Dealers stand by their vendor

But despite Nortel's harsh fall from grace, partners are keeping their spirits up. 

Intrinsic Technology, which still hopes to double its Nortel business in 2009, is one of several taking an optimistic viewpoint this week.

Managing director Allan Gauld thinks administration will be good for Nortel, saying, "It offsets its debts for the time being, and it can use the cash it has in the bank to restructure.

"I am convinced the enterprise business will remain," he continues. "It needs to remain because its footprint is hundreds of thousands of users in the UK alone."

Gary Young, CEO of communications applications developer and long-term Nortel partner Datapulse, also lends his support.

"We are committed to continuing research and development into applications for Nortel platforms, which remain at the communications core for many public and private sector organisations," he says.

Andrew Sheppard, UK head of distributor Azlan, says that although some will be put off by Nortel's troubles, its enormous installed base guarantees the business to some extent.

"End-users looking at new projects will inevitably have questions and may move to other vendors," Sheppard says. "However, customers with investments in Nortel will look to secure the investments they have made."

Competitors on the attack

Ovum's Cooperson and Walker warn that the bankruptcy filing will be exploited by Nortel's competitors.

"Competitors are in a strong position to remind customers that Nortel can no longer give assurances of continued development of any specific products, which will surely impede Nortel's ability to bring in new business," they say.

There is mileage for rivals in punting kit to panicking customers, but Gauld says Nortel users are telling him they want to sweat their investments. 

So the timing of its filing, coming in the opening throes of a major recession, could be a lifesaver for Nortel as customers cut spending.

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