Nortel has left the building
With the vendor's demise on the horizon, the sum of its parts could now be greater than the whole, says Sam Trendall
Nortel: Another industry veteran bites the dust
More than 100 years of history, market capitalisation that soared to highs of $250bn and almost 100,000 employees were ultimately not enough to stop Nortel’s demise.
The company has agreed to sell off its two biggest business units by revenue, with its wireless unit going to Swedish telecoms giant Ericsson for $1.13bn (£690m).
A $475m stalking horse deal has been agreed with rival Avaya for Nortel’s enterprise arm, and its application delivery business was sold to Israeli vendor Radwareearlier this year. Nortel continues to seek buyers for its remaining units.
When the Ericsson deal was announced, Nortel chief executive Mike Zafirovski stressed his commitment to conducting the break-up process in a way that benefited Nortel, its customers, staff, partners and its potential owners.
“We are determined to maximise value while preserving innovation platforms, customer relationships and jobs to the greatest extent possible,” he said. “With today’s agreement and through the anticipated sales of the company’s other businesses, Nortel will leave its mark on the industry for decades to come.”
Rob Bamforth, principal analyst for Quocirca, agreed that Nortel could still enjoy a presence in the market through the continued development of its technology.
“Breaking the company up constructively could work out well for the various groups and technologies,” he said. “The individual assets have a chance of a better life if they go their separate ways.”
The Ava ya deal for Nortel’s enterprise wing was greeted enthusiastically by UK channel partners last month, who claimed the announcement brought some much-needed clarity.
Michael Lloyd, managing director of Gold partner Proximity Communications, claimed the news had allayed his fears over the future of the Nortel portfolio.
“We are pleased about the announcement because it has been dragging on and at least we now have some firm information,” he said. “Our account managers have also been sitting waiting for the past six months and now they feel there are opportunities for them. The product is going to be around for the future.”
Nortel’s gradual disintegration is a sad end for a company whose origins can be traced to the incorporation of the Northern Electric and Manufacturing Company in 1895. During the first 70 years of its life the company enjoyed success with a wide range of products, including gramophones, switchboards, kettles and washing machines.
In the mid- to late-1960s the firm became interested in fibre optic cabling and digital communications. In 1975 its first digital switching products were unveiled and the company changed its name to Northern Telecom the following year.
The launch of Nortel’s DMS line of switches, in particular the DMS-100 model in 1979, proved the catalyst for a period of impressive sales growth which saw the company become one of the communications market’s biggest names.
Technological problems stemming from Nortel’s software hampered progress in the 1980s, but by 1995 the firm was once again growing revenue healthily.
In 1997, Nortel banked $829m in net profit on sales of $15.45bn. John Roth was named as chief executive in 1997 and geared the company’s strategy towards
internet-based communications technologies.
The tech boom saw a swathe of market watchers invest in the company, driving its stock price to a high of C$124.50 in 2000. Nortel’s muscular market capitalisation helped it to undertake a flurry of acquisition activity in 1998, including a blockbuster $9.1bn stock swap deal for Bay Networks in August of that year.
The company then changed its name to Nortel Networks to highlight its broadened focus. In 2000, Nortel posted sales of more than $30bn and at the year’s end employed 94,500 staff. But the worm was already beginning to turn and, despite being cash rich, Nortel failed to post a yearly profit between 1997 and 2004.
Iain Milnes, president of IP telephony vendor Zed-3, claimed Nortel had cast its net too wide in recent years.
“It should have focused on its core business and on developing products that companies wanted,” he said. “But instead it was all over the place. At [former company] Zultys, I competed with it in the IP PBX market in which it was not really very good.”
Milnes added that Nortel’s wireless unit, which attracted bids from Nokia-Siemens Networks and Research in Motion before the agreement with Ericsson, could have been a fruitful furrow to plough for the company.
“Three big companies with deep pockets valued that business highly,” he said. “It was a business that was profitable and one on which it should have focused. It can be a tough decision but, sometimes, you have to throw away stuff that is not profitable and just focus on what you are good at; or at least what you are making money at.”
In 2007, the US Securities and Exchange Commission (SEC) brought civil charges against Nortel for accounting fraud. The SEC had launched a formal investigation three years earlier and concluded that former Nortel top brass, including ex-chief executive Frank Dunn, had been cooking the books between 2000 and 2003.
Nortel settled the case for $35m in October 2007, having already paid $2.47bn to settle two related class action suits. In 2008, Canadian police brought criminal fraud charges against Dunn. It was alleged that the company’s 2000 results brought forward $1bn in revenue recognition to ensure Wall Street expectations for Q4 performance were met.
Meeting the market’s expectations was again the driver for Nortel’s management team to use $450m of excess reserves to boost the numbers between 2002 and 2003, the SEC alleged.
Starting in autumn 2003, Nortel restated its accounts for the period between 2000 and 2003 numerous times and Dunn was axed in 2004.
Bamforth claimed damage done to the Nortel brand through the scandal was more serious than if it had been a consumer brand.
“The company was typically selling to very large multinational players,” said Bamforth.
“Therefore it was not able to amortise its brand equity through a huge number of customers. Going down in your customers’ estimations became more of a risk because it was not fine-grained, but very coarse-grained.”
Frank Dunn was replaced by Bill Owens, who served as top dog for a year and a half before Mike Zafirovski was hired in 2005. Owens had worked to stabilise the company but Zafirovski still faced a tough challenge.
Between 2000 and 2002, Nortel’s stock value plummeted, with its share price sinking as low as $0.47. Staff levels were also incrementally reduced and sunk from 94,500 in 2000 to about 30,000 at the time of Zafirovski’s arrival.
Early indications gave some cause for optimism; in 2006, Nortel grew revenues by nine per cent year-on-year and banked $28m in net profit. But jobs continued to be cut and moved to lower-cost environments and 2007 was tougher still. Revenue fell by four per cent to $10.95bn and the company posted a loss of $957m.
The situation worsened throughout 2008, with full-year revenues slipping nine per cent to $10.42bn about a third of the figure generated in 2000. Net losses soared to an eye-watering $5.8bn and, in January 2009, the company entered Chapter 11 bankruptcy protection.
Zed-3’s Milnes has experienced the volatility of the industry first hand, having been at the helm of Zultys when it succumbed to bankruptcy in 2006.
But the channel veteran expressed surprise that a company with Nortel’s scale and history ultimately met the same fate.
“With Zultys I know what mistakes I made and am not happy about what I did,” he said. “But it does seem staggering that a company with Nortel’s management expertise and experience had so many opportunities that it squandered.”
Ericsson bags Nortel wireless arm for $1.13bn
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