Nortel News: Rethinking Bay Networks Acquisition, Delisting Threat

As Nortel (NT) struggles to become/stay viable, one of the criticisms lobbed at Nortel is that it is still a voice networks-centric supplier at a time when data networks are becoming the way to carry voice, video and data.

It got me thinking back to 1998 when Nortel and CEO John Roth made a bold move into the enterprise/data market by spending $9.1-billion to acquire Bay Networks. The much-speculated deal was seen as an aggressive move by Nortel to take on rivals such as Cisco (CSCO). Here’s how Nortel described the deal:

The transaction creates a new category of company that will be the first to deliver mission-critical Internet Protocol (IP) integrated networks that will reach anyone, anytime, at any place in the world. These next-generation networks will unleash innovation and enable customers to gain competitive advantage and realize their full business potential.

Fast-forward a decade in which Nortel is still struggling to establish itself as a leading enterprise/data player, and you realize how badly the Bay acquisition worked out.

Whether it was a bad deal, a flawed cultural fit or simply terrible post-acquisition decisions, Nortel’s big bet on enterprise/data was a bomb. Imagine how different things could have been if Nortel had bought someone else?

One/Two Punch

Talk about taking a painful one-two punch to the solar plexus as you’re scrambling to stay upright.

Last week, it emerged that Nortel is seeking advice for bankruptcy protection, and its shares could be de-listed from the NYSE because they haven’t traded above $1 for 30 consecutive trading days.

If you’re a Nortel customer, are you getting a lot more nervous about buying Nortel gear? If you’re a Nortel competitor, is now the time to aggressively court the company’s partners and customers.

Putting aside Nortel’s own problems, the biggest issue right now is consumer confidence. Nortel can talk until the cows come home about its VoIP technology and energy-efficient products but it doesn’t matter a lick if customers don’t think you’re going to be around.

Rich Tehrani has a story on TMCNet on Nortel’s prospects and how, despite the doom and gloom, the company can still be viable.

CNet has a story looking at the NYSE’s decision. Marguerite Reardon suggests:

The problem for Nortel is that its bread and butter products are ones used for building voice networks. Over the past decade phone companies have moved away from building networks exclusively used for voice toward converged networks that carry voice, data, and video using Internet technology. While Nortel has tried to keep up with the changing needs of the industry, it has fallen short.

What’s interesting is Nortel made a huge move ($9.1-billion) to get into the enterprise/data markets when it bought Bay Networks in 1998, as mentioned above. It’s unfortunate the deal worked out so badly.

Comments

[JimN:]

Maybe I'm not the most authoritative person to comment here but having lived through that and saw first hand how this went... I've read plenty of commentary on the subject but its always easy to be an "arm-chair quarterback". Regardless, the recent article from HBR regarding flawless execution, is absolutely applicable. Even 8 years later, NT was still treating Bay separately so simply put, it wasn't the concept that was flawed or even the opportunity, it was in the execution. That was one for the business history books as a good example of how not to merge two companies.

At the end of the day, Nortel had and still has some of the most brilliant minds in technology and have had some outstanding ideas and concepts but as in any business, its how you execute that differentiates you.

2008 Dec 15 09:38 AM

[Jan-Willem:]

At least with the Bay acquisition they acquired a full portfolio, a brand and an installed base. The Passport 8600 series stems from the Bay acquisition.

Two years later they spent almost the same (7.8 Bn) for a one product company without a history and no Sales force to speak of. It was called Alteon...

2008 Dec 15 09:38 AM

[tiredofitall:]

Amen to both comments. Having lived through it as well, it was 100% the execution that was so poorly planned, there is still the seperation 10 years later. It was the buying spree that Roth took Nortel on right after that Bay purchase that was destructive...18 companies in 2 years....a corporation that couldn't execute became broken as a result.

2008 Dec 15 09:43 AM

[ex-bay:]

I was an engineer at Bay Networks at the time.
There were plenty of things that didn't make sense to us.
There were some short term issues with Nortel suddenly being
scrutenized as a datacom company, but that's temporary.
My two biggest concerns were that Nortel considered Bay as
a well-running that didn't need fixing, when in fact the Bay employees
were hoping for changes.
The other concern is that some router projects were cancelled because they overlapped with existing Nortel products insofar as "speeds and feeds", but didn't cover the router functionality.

2008 Dec 15 09:52 AM

[Red Green:]

John Roth, in hindsight, was a disaster for Nortel. He began to think that Nortel's good times and initial success in fiber optics was due to his brilliance and he went on a buying spree. Don't forget that Frank Dunn was his hand-picked finance guy (with a reputation for arrogance and no people skills). I was with Nortel at the time and even I saw the coming problem with fiber overcapacity and what it could do to the company if not handled right. Nortel does have some very good people and technology. I hope it can survive and come back. If so, Roth and Dunn should be case studies of what not to do.

2008 Dec 15 10:42 AM

[Stick2golf:]

I was a VoIP engineer at Nortel at the time and was excited about the possibilities. However, as always, Nortel stuck to the DMS architecture for every VoIP product and failed to utilize the Bay Networks equipment in their core. I left after our planned convergence with Bay products was cancelled in favor for a DMS platform solution. Nortel has held on to their DMS product family toooo long by putting lipstick and glue on old technology and does not have a true triple play solution. It is a shame since their are some great engineers at Nortel that the leadership did not utilize.

2008 Dec 15 10:47 AM

[Brian Harrison:]

"""The problem for Nortel is that its bread and butter products are ones used for building voice networks. Over the past decade phone companies have moved away from building networks exclusively used for voice toward converged networks that carry voice, data, and video using Internet technology."""""

This might have been 12 years ago but Nortel's Bread and Butter is Optical Transmission Network ie voice, data, and video using Internet technology. The problem is that there is so many new supplies ie Transmux Ciena and so on. Nortel instead of scaling down and making new products that were more compact like ciena they kept going with making 40G cards rather than focusing on DWDM and gbe what they all ready had. They got stuck in the past! Big isnt always better.

2008 Dec 15 11:54 AM

[inventor61:]

I came through the SynOptics -> Bay Networks -> Nortel route and saw the whole thing unfurl over a span of just a few years. I should write a book! What an enormous gathering of top talent and enthusiasm, squandered and decimated. The company was killed when they had to get rid of 2/3rds of the employee base in 2001. No company can survive that, no matter how much 'dead weight' the claim was they were carrying. Nortel has been a corpse since then. Exiting businesses before their 'replacements' were on-line and generating cash is unwise at best, and look what happened at worst. Just terribly sad, how a 100++ year old company known for innovation and success can be wrecked in just 10% of that time.

2008 Dec 15 12:37 PM

[FireMr.Z:]

In the final analysis, Nortel Networks became the General Motors of Telecommunications Manufacturing.

2008 Dec 15 06:56 PM

[bobace:]

There is considerable discussion on US Bankruptcy Law Chpt 7 reorganization but NT Holding Company that is the listed reporting issuer has several operating units. One of the largest subsidiaries is the Canadian unit that would not fall under US bankruptcy law unless it was 100% owned by the US subsidiary - which would be subject to Chpt 11 filing if NT choose that route. The problem with Chpt 7 for the US subsidiary would be that NT would need to argue that it had no other choice. One theory that continues to be miscommunicated is pension liability. The Canadian pension plan is governed under Ontario (Canada) pension law The Ontario government announced that it will enact pension law changes in May-2009 that will be retroactive to Sept-30-08. The new change would defer pension liabilities from 5 years to 10 years. The US pension industry is in similar reform mode to mitigate the recent credit crisis fall-out in market valuations and credit facilities. The SEC had suspended accounting rules that would otherwise require "mark-to-market" of securities portfolios that have been hammered by the 40%-50% drop in stocks. Finally, there are many companies with a fraction of NT's sales and simple business models that have materially higher valuations. What NT has is the ability to cut costs further to survive. What it needs is manage will to act swiftly to reduce (sell-off) its business model to reorganize into less competitive and higher profit margin product/service markets while cutting costs.

2008 Dec 19 09:16 PM

[NTbeliever:]

I don't think the Bay acquisition was the big mistake, or necessarily a mistake at all. If not for that acquisition, who else would be able to compete full-on with Cisco in the enterprise space today? I also don't buy some of the so-called expert comments about being Nortel being slow to realize that customers were buying IP. I looked at the same market adoption forecast charts for 6 years in a row, with the big incline and shift over to IP being handily moved out to the right in each updated version. Most, many, some customers were not buying it for years after the experts said the crossover had arrived...because plainly it just didn't make sense for them. Whatever the outcome with Nortel, I credit them for enabling a rational evolution to VoIP...and for that we can thank their so-called failed merger of a voice and data company. Left in Cisco's hands we'd be re-booting to dial 911. Nortel has made some bad decisions...financiall... structurally, and competitively, but they have always led in innovation and gone to extreme lengths to serve customer's needs.

Jan 13 11:29 PM