Death Knell for Nortel?

Last week, Nortel Networks Co. (NT) sunk to a new low -- literally -- when its stock closed one day at 99 cents per share, ushering the global telecom giant into the realm of penny stocks that is notoriously hard to climb out of. And that wasn't even the worst news. National Bank Financial analyst Kris Thompson said that even at 99 cents, the stock was too expensive. He slashed his target price to 50 cents from $2.75 previously, and said he could no longer see any positive scenarios for investors.

"Our initial thesis was to reduce holdings on positive news events," Thompson wrote in an Oct. 28 research report, citing his earlier expectation that news of a large asset sale or a major customer win could boost Nortel shares, at least temporarily. But he added that "given the unprecedented change in the economic outlook, we'd exit any remaining investments in Nortel."

Pretty strong words from an analyst who as recently as early October had faith that Nortel was successfully restructuring. And Thompson is not alone with his dire outlook. The discussion these days around Nortel is increasingly taking a "final days" tone. Some analysts say the company's planned sale of its Metro Ethernet Networks business, regarded by some as the company's crown jewel, will not be the last asset Nortel has to part with just to remain liquid. Nortel has been especially hard hit by the soft stock market, which has added to its $1 billion-plus pension deficit.

This story equates the company's decision to put its Metro Ethernet business up for sale as "outright capitulation" and says that "the chorus of voices suggesting Nortel will ultimately be dismantled is growing louder."

One theory is that after Nortel disposes of its Metro Ethernet business, it will shift its focus to selling its wireless assets as it scrambles to raise cash to pay off debt and meet its mounting pension obligations.

"They have to become a lot smaller," said one analyst who asked not to be named. He argued that if his prediction for not one, but two, major asset sales turned out to be true, the surviving business focusing on enterprise and voice-over-IP assets would be a shell of the former Nortel.

And even that could turn out to be a best-case scenario. Nortel, of course, has not yet found a buyer for its Metro Ethernet business. One source says that talks with one interested buyer have fallen through. Although analysts say the business is a relatively attractive property that should attract other interested buyers, they question how much Nortel would get for the unit in today's tough deal market.

"We lack confidence on timing and value of the potential sale," UBS Investment Research analyst Nikos Theodosopoulos wrote in a research report.

Despite this uncertainty, one theory circulating is that Nortel is determined to have its dismantling underway before the end of the year and could have some news on this front by Nov. 10, when it reports quarterly results. -Andrea Orr

See Sept. 25 post on Nortel's effort to sell its Metro Ethernet Networks business from Tech Confidential
See Nov. 1 story on Nortel from Canadian Business Online

Comments

[Red Green:]

What Frank Dunn and his financial guys did to Nortel is a tragedy. A bank robber who steals $100,000 from a bank gets 40 years or so. Dunn and crew have done far worse to a company, its employees and stockholders and ruined the financial security of thousands of people. Yet, my bet is that the Canadian authorities will go slow on prosecuting Dunn. A guy who goes into a bank with a gun is a real chump. Get smart--get a degree and suit and ruin a company while giving yourself and your cronies huge bonuses.

2008 Nov 04 09:39 AM

[divzom@yaho...:]

The pension overhang is systemic to most corporations and all pension funds. Just as we have seen banks and insurance companied socialized via government bailouts, we can probably see state assistance/protection broadened.

A starting point would be to relax mark-to-market accounting rules to stabilize corporate books across-the-board, and reduce the positive feedback effect on market volatility.

Secondly, selective cash injection via convertible shares would certainly help some corporations such as Nortel, while also benefiting the tax payer via longer term appreciation.

Thirdly, some companies are strategic assets and I would argue Nortel falls in that category for both the US and Canada. A few sole-sourced contracts to prime the pump would certainly help. Canada is faced with a major telecom infrastructure upgrade if it wants to remain internationally competitive and can look to the recent Australian initiative, especially for thin routes to increasingly strategic arctic areas in which national interest considerations come into play.

Yes, Nortel has been savaged by the tech bubble and corporate malfeasance, but was turning around nicely before it got caught up in the global credit crunch. It still remains a solid intellectual and technical capital asset.

2008 Nov 04 11:51 AM

[abckits:]

I am devastated personally. My life savings are in Nortel and like those of the last decline I am mortally wounded.
When it was .67 cents I had $100,000 but waited to see what would happen in a longer term. Finally made a decision at $8.00 per share.
What a joke!!!
Well, at age 78 I won't suffer too long, God willing and I feel for all the other walking wounded.
Now 1929 is understandable, as never before.

2008 Nov 04 03:49 PM

[Ramachandra...:]

Nortel has many problems that can be fixed. There are too many vested interests to do things the old way, and the executive team is out of touch with the technology team and the customers.

Case 1: (According to unnamed sources) Nortel had a deal with a large customer to develop features using the "Agile" model where value is generated in small increments, and customer feedback drives what is done next. The aim is to deliver business value quickly. It failed, but not because the customer didn't want it and was willing to pay. It was because the product managers didn't want customers talking to them or to their engineers, and they did not support that revenue-generating deal because it threatened their status quo.

Case 2: (From internal sources) The current executive team has implemented 6-sigma black belt processes without thinking about business value delivered. This has caused delivery deadlines to slip, thus delaying revenues. In fast-changing markets and technologies, delayed revenues is often the same as lost revenues. The executives don't get it.

Case 3: Most folks in the wireless business knew that to be able to sell GSM and CDMA equipment, you needed a UMTS story and product. Nortel sold off the UMTS technology and business, and as a result, GSM and CDMA sales have faltered. Apparently the executive team didn't know.

Case 4: (From internal sources) It is widely believed that the leaders of the Metro Ethernet unit asked Nortel to sell them, and not the other way around. That suggests that the executive team has lost control. Also, recently when the deal was about to close with a large far-eastern equpiment company to purchase Metro Ethernet, a very large American service provider cancelled a large purchase agreement for Metro Ethernet equipment because they didn't want to deal with the far-eastern company. What's amazing is that the executive team didn't know their customer well enough to realize that such an asset sale would jeopardize sales.

The current board of directors is clueless, otherwise they would make sweeping changes at the top. Shareholders are poorer, but still keep electing the same boards of directors. Too bad.

2008 Nov 05 10:19 AM

[noguru1:]

This is really just more of the same, to be honest I'm surprised Nortel is still around.

I left the company in 2001 after the bubble burst, while Nortel was selling-off its billion-dollar acquisitions for change, remember Clarify, Architel, Preside, Periphonics etc ...? Worse than the lost funds, you could really notice that many of the best Nortel people were leaving the company during that time. The remaining staff wondered about their future rather than focusing on the business. At the time there were more than 90,000 employees ... and customers canceled or delayed contracts, already worrying about Nortel's survival ability.

I really don't see how the company can pull-off a rebirth with new restructuring ahead, but I do wish them good luck!

2008 Nov 06 12:03 PM

[rb25:]

As a former employee of BNR and Nortel, I wonder what the effects of losing Nortel will be on R&D in Canada. BNR and Nortel were huge catalysts for innovation and development in Ottawa and Canada. Look at the high tech companies around ottawa that had roots in Nortel. (Mitel, Newbridge etc).
As a university student I along with hundreds of others did coop terms at BNR and later went on to join Nortel. I wonder what will come in its place.

2008 Nov 06 03:35 PM