Wednesday, January 14, 2009

Nortel Files for Chapter 11

Marking a significant chapter in telecommunications history, 113-year old Nortel Networks filed for Chapter 11 bankruptcy protection in the U.S. and under the Companies' Creditors Arrangement Act ("CCAA") in Canada. Nortel said the filing will enable it to deal with its cost and debt burden, to restructure its operations and to narrow its strategic focus in an effective and timely manner.

Nortel said normal day-to-day operations would continue without interruption. To ensure its supply chain, Nortel has made a special arrangement with Flextronics by which Nortel agreed to purchase US$120 million of existing inventory by July 1, 2009 and to make quarterly purchases of other inventory and to terms relating to payment and pricing..

"Nortel must be put on a sound financial footing once and for all," said Nortel President and CEO Mike Zafirovski. "These actions are imperative so that Nortel can build on its core strengths and become the highly focused and financially sound leader in the communications industry that its people, technology and customer relationships show it ought to be. I am confident that the actions we're announcing today will be the fastest, most effective means to translate our improved operational efficiency, double-digit productivity, focused R&D and technology leadership into long-term success. I want to reaffirm Nortel's dedication to delivering world-class solutions and services to customers." According to industry reports, Nortel currently has about $2.4 billion in cash, a burn rate of $100 million per month and a heavy debt load of $4.5 billion. 14-Jan-09
  • In November, citing a worsening of economic conditions, Nortel confirmed plans for further job cuts. Revenue in the third quarter of $2.32 billion decreased 14 percent year over year and down 1 percent on a year-to-date basis. The decline compared to the year ago quarter resulted from a challenging economic environment, competitive pressures and reduced spending by key carrier customers. Plans called for the reduction of approximately 1,300 positions, with about 25 percent of the net reduction taking place in 2008 and the remainder in 2009. This is expected to result in annual gross savings of approximately $190 million, with total charges to earnings and cash outlays of approximately $130 million. In addition to deeper cuts in spending, the company is considering possible sales of its real estate holdings.
  • Effective January 1, Nortel adopted a vertically integrated business unit structure. This includes one business unit focused on Enterprise customers and two business units focused on Service Providers: Carrier Networks (consisting of wireless and carrier value-added activities), led by Richard Lowe; and Metro Ethernet Networks, led by Philippe Morin. A dedicated global carrier sales organization will support both business units, led by Darryl Edwards.
  • There was no update at this time on Nortel's review of the potential divestiture of the MEN business.
  • In 2000, the company reached a peak annual revenue rate of $28 billion. At the point, it employed 93,000 and boasted a market capitalization of nearly $250 billion, accounting for one-third the value of the entire Toronto Stock Exchange. Following the bursting of the dot-com bubble, Nortel became embroiled in an accounting fraud that led to prosecution of its key executives.
  • Founded in 1895, Northern Electric and Manufacturing traces its roots back through Bell Canada to Alexander Graham Bell.