Has Nortel Become a Takeover Target?

With Nortel’s (NT) market capitalization sinking below $600-million, one thing you have to start wondering about is whether Nortel is becoming cheap enough to be subject of a hostile takeover offer.

If an LBO or a telecom supplier (Huawei?) swooped in with a $750-million to $1-billion offer, what could/would Nortel do? Nortel’s board of directors have a fiduciary duty to serve the interests of shareholders, and given state of affairs, they would to have to consider an offer.

At the same time, how much investor fatigue do Nortel shareholders have? The stock has been swooning to the point where even the most optimistic people (such as Paradigm Capital analyst Barry Richards) have to be wondering if Nortel is ever going to bounce back.

While I’m just openly musing about a possible scenario, it is important to remember that Nortel had $4.47-billion of debt (and $3-billion of cash), and the difficult capital markets aren’t exactly MA&-friendly.

As well, Nortel could be an entirely differently looking company in a few weeks depending on what is announced during the Q3 conference call. It may be a significantly smaller entity without its Metro Ethernet network business so it will be interesting to see how investors - and potential buyers - respond to the New Nortel.

Comments

[LastHopes:]

Mark you are genius. Each your comments on NT is full of deep thinking and backup by deep research efforts. Especially your prediction back in June, NT is going to hit $23.
Now again, after very hard thinking process you come up with not trivial conclusion about possible take over and astonishing comments about BOD - Nortel’s board of directors have a fiduciary duty to serve the interests of shareholders".
What can I say? WoW.

G

2008 Oct 27 10:34 AM

[omega90963:]

Don't think the government of Canada would allow a hostile takeover.
Nortel is part of Canada's national interests and technology future.
In terms of financing, national banks and the government would facilitate financing in today's environment, if it was needed.
But, Nortel has enough cash for the near future and is unlikely to need it.

2008 Oct 27 10:59 AM

[Red Green:]

Nortel's board of directors are virtually useless. Where were they when the company was spending money like crazy on optical products and most could see that there was great overcapacity? Where were they when Frank Dunn and his crew were running the company into the ground while making sure to take care of themselves? And where have they been in the last year or so when the company is drifting with little or no direction and the stockholders are taking it on the chin? The reverse stock splits really helped the stockholders, didn't they? The board of directors are a joke and need a brain transplant and an enema.

2008 Oct 27 11:33 AM

[User 93660:]

Fire the CEO.....fat salary and no leadership
and throw out the board with the bath water.

2008 Oct 27 03:01 PM

[colo:]

If Nortel was to be acquired probably would have happened already. Are they waiting for the MEN to go away?? Hard to say... 4.5 billion debt and 3 billion of cash. That would be a good for anyone. Your last paragraph, "...Nortel could be an entirely differently looking company in a few weeks..." I believe that's the key here...

Oh, one more thing, for those that read this... Mr. Z has done an outstanding job with Nortel. You don't turn a 12 billion dollar company overnight, but he is turning it...

2008 Oct 27 05:13 PM

[Red Green:]

Usually when people do an outstanding job, the stock price reflects it. Mr. Z has made little difference and, in fact, may have made things worse. The market judges performance and it seems to be saying it is something less than stellar. I wish it was an outstanding job, because then maybe my stock would be worth more than a dollar and a few cents. And maybe it wouldn't have suffered a reverse split. Sad when over 2,000 shares becomes 200 and those 200 are worth enough to buy 5 print cartridges.

2008 Oct 27 09:59 PM

[canb888:]

colo, what do you mean by "Mr. Z has done an outstanding job with Nortel. You don't turn a 12 billion dollar company overnight, but he is turning it..." One year return of negative 94% per Yahoo. The 12B you mentioned is now less than 600M. I think a cleaning lady could also turn a $12B company into a $600M one, it does not take too much effort to do that and does not need a multimillion dollar executive. Sounds like: How to build a 600 million-dollar company: start from 12,000 million-dollar company. BTW, NT used to own a lot of land and nice buildings which should be worth more than $600M if they still have them today. I guess they may have been disposed of to pay for opperating losses. What a shame for a company that used to be 25% of the total capitalization of the Toronto Stock Exchange. And, there is not much left about NT being a Canadian. Takeover? Maybe that's the best thing to happen before the 600M becomes less than 30M (lose 95% again in one year?).

2008 Oct 27 11:58 PM

[Rocky Kahn:]

NTis still trading below book value, that is about $5. I think it would be a good investment, in case the company get dissollved......though shareholders would be paid in the last, yet they would be getting something
over current price of $1.02. It would be even better if it gets taken over by other telecom company. So better buy now.

2008 Oct 28 01:22 PM

[Just Frustr...:]

I don't disagree at all that NT has made some bad decisions. However, I don't think it's broken at C-suite level executives but rather at the middle to senior management. I don't know what they've been telling Mike Z. and his cabinet but it hasn't been what their employees have been telling them. These are the people who keep getting moved from one position or division to another and ruin every dept. they get put into.

Even today they are in denial and keep making stupid decisions.

2008 Oct 28 05:13 PM

[Serraphin:]

A stock is punished for poor performance. A stock is trampled when the market wants its exectuive replaced. The stock gets buried to penny status when the board refused to respond to the markets clear call for change. Why Mike Z. continues to remain at the helm is beyond me. It took the CTO to convince him to stop putting 80% of the RnD budget into legacy technology. Why did it take several years and a CTO to explain the obvious to the Chief Executive. The board needs to fulfill their fiduciary duty and begin to protect the share holder. It needs to flaten the corporate structure, it needs to hire a hungary CEO with his compensation HEAVILY tied to stock performance so he gets wealthy if the share holder gets wealthy. Secondly Nortel needs to decide if its a Unified Communications integrater or a telecom. Are they keeping the telecom portion out of nastalgic loyalty to Northern Telecom? With the current political correctness regarding prudent energy policies why are they not more aggressively selling/pushing their technologies to energy conscious companies. Google for instance utilizes solar panels on many of buildings to reduce power consumption. If Nortel's product line really reduces power consumption over Cisco why are they not making any headway. Poor execution from C-suits to the middle tier is why. Change needs to start at the top and an aggressive and competitve culture needs to be revitalized from within the company before the final nail is placed in the Nortel coffin.

2008 Oct 28 09:31 PM

[Red Green:]

Serraphin is right. Something needs to be done at Nortel and immediately. Mr. Z is obviously not the right guy for the job. Coming from Motorola was probably not smart--their culture is totally different from Nortel's needs. The board of directors has failed miserably in doing their job and should be replaced. Probably their major decision each meeting is where to eat lunch. Do these people realize that they are supposed to be working for the stockholders and protecting their interests? I realize it is not politically correct in some circles to say that but protecting the whales and rain forests has little to do with economic progress and technological advancement. Bring back some of the old hands and throw out the B-school wonders and leeches and save a once great company. Time is running out.

2008 Oct 29 11:14 AM

[Serraphin:]

Has anyone even looked into the revenue loss potential when the MEN division and presumably all their patents are divested? Are we to believe Nortel will accomplish the impossible feet of selling MEN without any of the patents that they either created or utilize for their products? Nortel, its employees and its investors do not warrant penny stock status. Owens possibly could have better retained value.

2008 Oct 30 12:12 AM

[FrustratedE...:]

MEN sale is a joke. Redback has many radio ads for MEN engineers, and many are happy to leave a sinking ship. The company is straightjacketed by top-down controls, policies, and process that prevent any innovations by underlings and make doing anything take longer and cost more. Its communistic central planning committee run operation and Lean Six Sigma consultants are the Party members. Most remaining employees preserve mental health by giving up on trying to change the system or make things better and just put in their 8-5 workday. Instead of breaking down inefficient, too-controlling processes, the LSS Master Black Belt Ninja spreadsheet jockeys tweak little, worker level procedures. The LSS religion has also got all managers faces in spreadsheets so they have no awareness of what is really going on around them, like kids on Ipod. MikeZ pumps out lots of sunshine and press releases, but the place is still straight-jacketed by the culture of control forcing many bad actions because those mid managers don't have authority and inter-orginazational cooperation to do better ones within lifetimes, um, timeframes. He and his little MBB helpers have not changed that and don't deserve the money they get. They inflict metrics on everyone but themselves because their totals add up to failure.

As for being a Canadian asset, NT has been aggressively globalizing its workforce. China has made fools of all the tech companies who rushed to invest there to grab a future market. With no Intellectual Property rights protection in Cn, Nortel and others were just big Open Source contributors. Now that Chinese companies had time to aquire technology and grow, they get the business and foreigners like NT get dismissed. Silly, greedy, capatalist, fools.

2008 Nov 04 11:27 PM

[canb888:]

Interesting to revisit this article and all the comments especially that NT is officially broke now, only a few months later. The nightmare came true, 94% drop in 2008, another 90% drop in just a few weeks in 2009. This came faster than my speculation of "lose 95% again in one year". That's a result of keeping the Management and the Board. Should have fired them all and replaced them with my cleaning lady, she may have achieved a slightly better than 90% loss by surrendering to a buyer. And for those nationalistic thinking, there was nothing left about NT being a Canadian long time ago.

Jan 14 09:59 PM