Sponsored By

Nortel: Can This Company Be Saved?Nortel: Can This Company Be Saved?

Nortel's auctioning off lots of properties while consolidating internal operations. What's left?

October 3, 2001

5 Min Read
Nortel: Can This Company Be Saved?

In its news blitz last night, Nortel Networks Corp. (NYSE/Toronto: NT) stressed that it's remolding itself to fit the current economic conditions (see Nortel Swings Axe, Switches CEOs). In the process, it's jettisoning substantial "non-core assets" and changing its focus once again.

So what goes and what stays? And will it be sufficient to save the foundering firm?

Nortel itself is not giving much color. But a few key items of information can be gleaned from the deluge of data Nortel's dumped on press, investors, and customers over the past few days.

First, it's clear that Nortel's not really changing its product focus, even though it's reducing its focal areas from five to three. Three former focal areas -- Optical Metro, Intelligent Internet, and Voice Over IP -- are being folded into a single Metro group under the presidency of Frank Plastina.

This isn't a surprise. With former CFO Frank Dunn installed as CEO, it looks as though Plastina (who was also widely discussed as a possible successor to John Roth) has adopted responsibility for the majority of products at Nortel -- a job he's been working into all year (see Nortel's Empty Room at the Top).

It also seems clear that one of Nortel's primary goals right now may not be eliminating products, but cutting costs in areas such as manufacturing.

For instance, today Nortel announced it will turn over the manufacture, integration, configuration, and testing of its DMS circuit switches to C-MAC Industries Inc. (NYSE: CMS) (see Nortel Dumps Some More). While Nortel will continue to support the DMS products, it will cut an undisclosed amount by selling to C-MAC its DMS plant in Research Triangle Park, N.C.

Nortel is taking similar cuts elsewhere. In cases in which it's not eliminating products, it's intent on trimming the cost of manufacturing and supporting them. In France, for instance, the company has rearranged a longstanding distribution deal with its subsidiary Matra Nortel Communications. In a series of new contracts, Nortel is selling the equipment distribution rights in France owned by that subsidiary to a third party (see Nortel Divesting).

Nortel also will reduce its component business by 50 percent and take restructuring charges against the facilities that close as a result of that move.

All this rearranging doesn't mean products won't continue to be cut. Nortel already has sold access and DSL gear worth roughly $397.5 million to Zhone Technologies Inc. (see Zhone Acquires Nortel's Access Gear). On September 11, it announced the sale (terms undisclosed) of its M6500 PBX line to the European Aeronautic Defence and Space Company (EADS) N.V. (NYSE/Toronto: NT). And yesterday, Nortel announced it's arranged to sell Clarify, a maker of customer relationship management software that it purchased in 2000 for about $2.1 billion.

Nortel is selling Clarify for $200 million in cash to Amdocs Ltd. (NYSE: DOX), which makes billing and customer support software for carriers. Nortel says the sale gives Amdocs all of the Clarify assets, including its office in San Jose, Calif. Clarify says it will be trimming its 1,000-person workforce in anticipation of the merger with Amdocs.

In all, Nortel plans to net about $700 million from the proceeds of all sales of non-core assets, which will be recorded in the fourth quarter of 2001 and the first quarter of 2002.

In the end, will all of this slicing and dicing be enough to save the company? On the whole, financial analysts say yes. "Our thesis that NT remains well positioned to survive the downturn and positively benefit in the next cycle remains intact," writes James Parmelee of Credit Suisse First Boston in a note today.

Others seem more concerned with the overall economy than with Nortel's state of health. "We are maintaining our Neutral rating on Nortel... The company continues to experience declines... However, we are encouraged by management's comments it believes carrier spending is approaching sustainable levels and that it is ahead in its restructuring process," writes Christin Armacost of SG Cowen Securities.

Investors, too, seem positively disposed to Nortel's news. In late-afternoon trading today, Nortel's stock was selling for $5.54, up 0.25 (4.73%), though Nortel shares certainly didn't participate as heavily as other stocks in a massive Nasdaq rally.

But in light of the missteps of the past years, many ex-employees remain skeptical of the company, noting that the financials don't convey the flight of top engineering talent. In fact, Nortel's biggest problem may now be morale -- either in drawing new talent or convincing its best employees to stick around for a recovery. Many folk interpret the installation of a CFO in Nortel's top spot as a signal that the company could find no one better and that its assets are up for auction. They express concern that defections of executives like Jules Meunier, former head of wireless products, show Nortel's loss of recruiting cachet.

Despite it all, Nortel's management seems bent to its task of carving the company down to a more manageable size. "We clearly have laid out a workplan," Frank Dunn told analysts last night. "Now we need to execute."

— Mary Jander, Senior Editor, Light Reading

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like