Richard Lowe, President of Carrier Networks, Nortel

"We're at the beginning of a process, not the end of a process"

Craig Matsumoto, Editor-in-Chief, Light Reading

June 22, 2009

9 Min Read
Richard Lowe, President of Carrier Networks, Nortel

It's been a busy weekend at Nortel Networks Ltd. .

Late Friday night the company announced that Nokia Networks has offered $650 million for most of Nortel's CDMA and LTE businesses -- a deal that could preserve the jobs of 2,500 Nortel employees.

But at the same time, Nortel said it expects to sell its other businesses as well, thus dissolving the company and rendering its stock worthless. (See Nortel: It's All Up for Sale.)

Light Reading got a few minutes to talk with Richard Lowe, Nortel's president of carrier networks, who's in charge of the technologies set to go to Nokia Siemens. (Section 363 of the U.S. bankruptcy code requires Nortel to hold an auction to try to attract higher bids.) Lowe is also responsible for Nortel's GSM, VoIP, and IMS technologies.

As Nortel enters its endgame, Lowe shared thoughts on what went wrong and what employees, customers, and shareholders can expect next.

— Craig Matsumoto, West Coast Editor, Light Reading

Light Reading: Critics were already saying that the whole turnaround process, going back before the bankruptcy and receivership, was botched, and that Mike Zafirovski's plan was doomed from the start. They're certainly going to say it louder now. How do you answer to that?

Lowe: Well, those are your words, not mine. Even as late as June 2008, when we presented to the investors, we believed we had a plan that had the support of our customers and the support of our board, but we got caught up in what I would call a "perfect storm." Given the economy in North America and Western Europe -- and we are very heavily dependent on those markets -- combined with the capital assets drying up and the overall consolidation in the industry, it became very difficult to execute on our plan.

We were getting very strong endorsement on 40 Gbit/s and 100 Gbit/s and on our LTE, very strong support for our carrier VoIP business. We had the opportunity to transform Nortel and build on these innovations to turn the company around, but all these external factors in the industry, in the marketplace, and in the economy, curtailed any opportunity to bring those plans to fruition.

It serves no useful purpose to do second-guessing. We certainly had all the ingredients. We just ran out of runway in a very unforgiving marketplace.

Light Reading: When you're done with the selloffs, what are the chances of having a "Nortel" left?

Lowe: As Mike [Zafirovski, CEO] has highlighted in the announcement, after looking at this in a number of different ways, it looks like the best option for the stakeholders is an orderly disposition of the assets. It's not to say that the Nortel name won't be picked up by one of the acquiring units, and it is possible that if the appropriate value can't be found for some of the business units, we might be looking at some other kind of restructuring. It's very premature to discuss.

We're at the beginning of a process, not the end of a process. There's still the opportunity for other bidders to come in through the "363" process over the next 45 or 60 days. I think this is a good direction for the stakeholders, whether it's the customers, the employees, or the shareholders.

Light Reading: How did the company come to this decision?

Lowe: After a pretty deep analysis that's been undertaken, including the discussions we had about wireless and the other discussions we were having about the other business units, we decided the way to get the best return was this course of action.

We've been thinking a lot about this since before we filed Chapter 11, which we didn't want to do. Could we continue as a smaller company? Are there other business units that could be left intact?

On balance, this looks like the right answer. This consolidating environment right now is occurring across enterprise, across carrier VoIP, across metro Ethernet. Also, the operators are being pretty vocal in their desire to work with vendors with scale and real clout in the marketplace. Having too many players doesn't allow them to have economies of scale in their purchasing decisions.

Light Reading: You've had trouble selling the other businesses so far. Why would things be different now?

Lowe: We clearly have innovation in these other business units, whether it's our No. 1 position in carrier VoIP, No. 2 position in GSM core, No. 1 in GSM-R, or our innovation in 40 Gbit/s and 100 Gbit/s. The customer support we have in these technologies will allow us to get fair price, and the important thing will be to have multiple bidders so we can get fair value. If we can't, we'll have to look at different ways to move forward. I can't talk about discussions that are ongoing, but clearly, that will be the direction.

A lot of people talk about $650 million [for the wireless business] not being a lot of money, but everything is relative. It's a fair value for a business that's profitable but is in decline, not through its value but because it's a mature technology.

Light Reading: It seems a big part of the Nokia Siemens deal was the 2,500 jobs that move across from Nortel.

Lowe: Obviously, that is our intent in any of these transactions. In all the discussions we're having, it's clearly recognized that those employees are an asset. Nokia Siemens was looking at the resources we have in two main sites in Ottawa and Dallas. They [Nokia Siemens Networks] are relatively weak in North America, and this was a great way for them to strengthen. It wasn't just about getting those customers.

Since January 14, I think our customers were concerned that we wouldn't be able to deliver on our commitments under bankruptcy protection, but in fact, we've been able to do a stellar job of maintaining network performance.

Light Reading: Why didn't the Canadian government step in to help you?

Lowe: You'd have to talk to the Minister of Industry, [Tony] Clement, about their particular rationale and how they want to go about supporting innovation in Canada. Certainly, Nokia Siemens has been able to secure funding from the EDC in their effort to support a center of excellence in Ottawa. [Export Development Canada has committed to back Nokia Siemens's purchase with a $300 million loan.]

We did go to the government before we declared for creditor protection in January, and we were not successful in getting that kind of support. That's their decision.

Light Reading: Wouldn't you have had an easier time if you'd sold business units before going into restructuring?

Lowe: That's a pretty hypothetical question. We are in restructuring and bankruptcy protection. We can speculate, but we are where we are.

It's never easy to do things under creditor protection, but I think we've shown with the wireless business that people do see the value.

Light Reading: What made it so hard to sell businesses earlier? I'm thinking mainly of Metro Ethernet Networks, which was up for sale before the bankruptcy. (See Nortel to Sell Carrier Ethernet, Optical Biz and Nortel to Hold MEN.)

Lowe: I'm not responsible for the MEN business, but it ends up being a question of having the right value on the table for the innovation, the customer base, and the employees you have. I wasn't party to discussions. I don't know what dialogue was had with prospective bidders.

Prior to us declaring creditor protection in January, there was a lot of concern about Nortel and its financial stability. In those environments, there is always concern among prospective buyers as to how the revenue stream will be maintained and whether those customers will be continuing to buy that product from Nortel, because you're buying a customer base.

Since we filed on January 14, the resilience of all our businesses has been astounding. The declines were not as steep as we feared, and we paid AIP [annual incentive plan payments] to employees after our first-quarter results. So, that customer base is willing to stay with us. Now that the other businesses are up for sale, the stability of our customer base will help the outcome. (See Nortel Stays the Course, Declares Victory.)

Light Reading: Is it true you could have sold MEN to Huawei Technologies Co. Ltd. , if AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) hadn't balked?

Lowe: We can't comment on any particular bidders or rationale.

Light Reading: How much did Verizon help in getting Nokia Siemens to become a buyer?

Lowe: You'd have to talk to the various customers. If you look at the Nokia Siemens press release, there were quotes from Verizon, from Sprint Corp. (NYSE: S), from Telus Corp. (NYSE: TU; Toronto: T). Clearly, those three customers, and most of our customers, are pleased that Nokia Siemens has put themselves forward as a buyer. What private conversations may have been held between our customers and Nokia Siemens is really between them.

Most of our resources for LTE are located in North America. In fact, most of them are located in Ottawa, which, with the CDMA, gives Nokia Siemens a strong base to develop their North America presence.

The sale is essentially the CDMA business and substantially all of the resources available with that, and our LTE access assets -- and the reason it says LTA access assets is because it doesn't include the packet core. Their focus was on the eNodeB, which is essentially the base station for LTE.

The packet core will be subject to other discussions. We signed a license agreement with Hitachi Ltd. (NYSE: HIT; Paris: PHA) on the Evolved Packet Core, and we're working with Hitachi to be able to sell packet core into KDDI Corp. in Japan, so some resources will clearly go with that license to help Hitachi sell those products into KDDI. (See Nortel Snares LTE Core Deal and Nortel Keeps LTE Dream Alive.)

It's a non-exclusive license agreement, and it's specific to KDDI. Anybody can come and buy the product line, and they'd have access to the rest of the market. We've been very specific, in describing the Evolved Packet Core to potential buyers, that there is a licensing agreement in place, but we don't believe it impairs the asset in any way.

About the Author(s)

Craig Matsumoto

Editor-in-Chief, Light Reading

Yes, THAT Craig Matsumoto – who used to be at Light Reading from 2002 until 2013 and then went away and did other stuff and now HE'S BACK! As Editor-in-Chief. Go Craig!!

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