Should Nortel Be Sold for Parts?

Now that Nortel Networks Ltd. has filed for protection from creditors, it's natural to ask: What will the restructured company look like?

Nortel still owns some valuable technologies that could be sold. But will the stuff that's left be a viable company?

Nortel filed for Chapter 11 bankruptcy protection in the United States and requested a restructuring under the Companies' Creditors Arrangement Act (CCAA) in Canada. The latter is not equivalent to a bankruptcy filing. (See Nortel Files for Bankruptcy Protection and Canadian Gov't Supports Nortel.)

"Bankruptcy" doesn't always equate to "death," as the case of Redback Networks shows. (See Redback Closes a Chapter and Ericsson Offers $2.1B for Redback .) And Nortel is talking as if it's going to re-emerge after the restructuring is done.

Nortel didn't have to restructure just yet. It had the cash to easily cover a $107 million interest payment that was due tomorrow. But many analysts saw trouble down the line, with Nortel likely unable to pay off its total $4.5 billion in long-term debt.

By filing now, Nortel has "bought themselves a lot of time," as the restructuring could take a couple of years to sort out, says Barry Richards, an analyst with Paradigm Capital Inc.

Division bell
Analysts seem to agree that some pieces of Nortel will get sold off. The most obvious example is the Metro Ethernet Networks (MEN) division, which it's been offering unsuccessfully since September. (See Nortel to Sell Carrier Ethernet, Optical Biz.)

The question is whether all of Nortel could get sold off. Richards doesn't think so, but he believes divisions like MEN could form $1 billion standalone companies. They might not match the size of Cisco Systems Inc. (Nasdaq: CSCO), but "even a very profitable company that's got $1 billion or $2 billion in revenues can be meaningful," Richards says.

Many, though, think Nortel should be sold for parts.

"I think they should just split the company up into different technological segments, because I think it's one of those companies where the parts are more valuable than the sum," says Deb Mielke, principal analyst with Treillage Network Strategies Inc. "Wireless and the optical, to me, are their two most valuable assets."

The MEN division, which includes Nortel's optical business, is a prime contender for a selloff, either as a single chunk or in parts. An asset sale -- grabbing the products and technology but not the employees -- would seem a likely route, says Eve Griliches, an analyst with IDC .

"Having just seen the lab and the test equipment, anyone who pays for those assets is going to get a great deal," Griliches says. As for the employees, Griliches -- who'd worked at Nortel in the past -- thinks they would stand a decent chance of being hired by MEN's buyer. "There are probably at least 100 people in Ottawa you'd love to have."

Within optical networking, Nortel's 40-Gbit/s technology could be a prize. Rob Adams, vice president for competitor Ekinops SA , believes Nortel got a headstart with a means of transmitting 40-Gbit/s signals that optically behave like 10-Gbit/s signals -- making them easier to transport -- and that the rest of the industry is still catching up. "They spent years developing an ASIC team," Adams says. "Somebody has to pick up those ASICs."

Market blues
Considering how long a process the restructuring will be, it's natural to wonder: How will customers react?

Nortel's installed base of older equipment is relatively safe, as carriers are always reluctant to change vendors. If some of these products fall to new owners, the installed base would still get supported, writes analyst George Notter of Jefferies & Co. Inc. in note issued today.

But in the markets for newer products, Notter senses that a shift away from Nortel has already begun. "We believe that any pockets of newer Nortel infrastructure (particularly where's there's significant traffic growth) would be more apt to transition to other vendors," he writes.

As an example, he suggests metro optical gear, where Ciena Corp. (NYSE: CIEN) might benefit. And in long-haul WDM, Infinera Corp. (Nasdaq: INFN) had already been winning business away from Nortel -- Notter cites Level 3 Communications Inc. (NYSE: LVLT) as an example -- and Nortel's plight could accelerate that trend. (See Infinera Reaches Level 3.)

"We know of at least one specific customer situation in Europe where Nortel and Infinera are the two finalists for a WDM project. We now expect that Infinera would pick up that business," Notter writes.

— Craig Matsumoto, West Coast Editor, Light Reading

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Hanover_Fist 12/5/2012 | 4:14:06 PM
re: Should Nortel Be Sold for Parts? Nortel's first mistake was purchasing Bay Networks which, they thought, would catapult them from the traditional telecom (e.g., Bell Head) business into the high-tech world of networking (e.g., Net Head).

Compound this with a Canadian versus U.S. mental mindset battle and you have a sure-fire recipe for disaster.

It was a long bitter battle of "oil versus water" with the end result a likely break-up/spin-off/return-to the separate and distinct Carrier and Enterprise business units.
Belzebutt 12/5/2012 | 4:14:04 PM
re: Should Nortel Be Sold for Parts? Barely a speedbump only compared to Cisco sales, but they're still number two and enough to make several hundred million a quarter. That's enough revenue for a large enterprise company. Just imagine how much better their prospects would be if customers could actually look at these products from a technical point of view and not have to worry about the company's balance sheet. There's no way the second largest enterprise vendor can be simply declared worthless. There's enough value just in that space to make a great company.

Same goes for the MEN business, but that is more likely to get acquired.
realistic 12/5/2012 | 4:14:04 PM
re: Should Nortel Be Sold for Parts? te
Belzebutt 12/5/2012 | 4:14:04 PM
re: Should Nortel Be Sold for Parts? I think Nortel's enterprise business will end up being the surviving piece of Nortel in the long run.

Just look at the latest 5600 switches:

It's the best product of its kind in the industry. It runs circles around Cisco's products in that space (much faster, much cheaper, much more power-efficient - yes, with traffic running).

Couple that with the security and voice portfolio and you have the most well-rounded enterprise gear vendor after Cisco.

The carrier parts are more likely to get bought out and be made part of other companies.
Hanover_Fist 12/5/2012 | 4:14:04 PM
re: Should Nortel Be Sold for Parts? The highway to success is littered with the broken bones of "better products" - the trick is in the execution of sale.

Nortel's switch/router product line is barely a speed bump in terms of units sold as reported by the industry analysts (Dell'Oro, Gartner, etc...).

I wouldn't hold out too much hope on Nortel's Enterprise business - I think they're better positioned in the Telecom space above all.
danp5648 12/5/2012 | 4:14:02 PM
re: Should Nortel Be Sold for Parts? Since everyone gone Enablance will pick up the remaining business.
jc_iii 12/5/2012 | 4:14:02 PM
re: Should Nortel Be Sold for Parts? Every manager from Nortel I have ever worked with has struck me as unimaginative except in making themselves look good to higher ups at the expense of achieving worthy goals.
And this seems to apply to the top echelons, with management focused on looking good to shareholders. Nortel seems to have a storied history in the financial pages. See for example http://www.google.com/hostedne...

Is this any surprise?
hyperunner 12/5/2012 | 4:14:01 PM
re: Should Nortel Be Sold for Parts? If somebody bought Nortel as a whole, they are inheriting the various liabilities, and the long term management incompetence that seems to be such a characteristic of this company.

Nortel employees might think that keeping the company together is their best hope in the short term. But longer term I would say there are better chances for some level of survival if the company is broken up.

There will be job losses whatever choice is made because the company is losing money, and has huge debts. It's an economic reality that they need to lay people off to save money. There have been some pretty cruel comments on this, and other lists. Let's all remember we're not immune from this recession (although Nortel's plight was only accelerated by the current macro economic situation - it was a case of "when" they'd fail, not "if".)

At least if the company is broken up there is a chance that some jobs can be saved.

waverunner 12/5/2012 | 4:14:01 PM
re: Should Nortel Be Sold for Parts? As far back as last October the business divisions were being primed and prepped for auction, milk washed and neatly divided along cost models. Those working for the corporate groups, technology, marketing, etc. were told to go back to their business divisions. Will NT be sold for parts? Well they've been trying. And what they were told is we're a buyer but without the obligations and certainly not for hard cash. Thus the recent filing.

Big Mike's liquidation center now open, all must be sold, payment terms flexible.

AntiTerry 12/5/2012 | 4:14:00 PM
re: Should Nortel Be Sold for Parts? While you are correct, what has supported that organization over time has been the marketing organization, which has been brilliant.
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