Nortel Needs to Sell Off the Small Parts, Keep the Big

There is a well-known tendency in this industry to emphasize technology at the expense of sales and marketing. It’s never been unusual to see companies with more patents than paying customers. But Nortel (NT) has never had this problem. Nortel salespeople have always been the sort to tell you they can meet any of your problems. As a result, they rarely have holes in the product line, whether you’re looking at data center switches or wireless base stations, they always have an answer. The problem with this approach is that it has left them with more product lines than just about any other equipment supplier, but very few category leaders.

Aim for #1 or #2 or Just the Top 10?

In spite of CEO Mike Zafirovski’s too little too late attempt to emphasize market position last year, Nortel has long been the antithesis of the company that wants all of its product lines to rank #1 or #2 in each category. And this is a big problem in networking, where market value has a habit of catching up to market share, regardless of current P/E or price/sales ratios. Even in this terrible market, Juniper (JNPR) has a higher market cap now than me-too data networking vendors like Cabletron, 3Com (COMS), and Newbridge did during the industry’s bubble in 1999.

With few leading product lines, Nortel’s business units are worth far less than their revenue would indicate. Its once dominant enterprise telephony business has been struggling against Cisco (CSCO), Avaya, and NEC, its routing and switching business trails Cisco, Juniper, and Alcatel-Lucent (ALU), in LTE it never had a chance of catching Ericsson (ERIC).

Bundling Diamonds with Dirt

The problem with breaking the company up by business units is that the few areas of strength get tossed in with their less valuable, weaker siblings. For example, Nortel Government Solutions, created when the company purchased PEC Solutions in 2005, has won some significant Federal contracts, and unlike other services lines, its success does not hinge on hardware sales. Selling it without the burden of the entire Global Services business, or worse, as part of one of the product units, would be far more attractive to potential buyers. Similarly, Nortel has been an early leader in 40 and 100G transport with its DP-QPSK implementation, which has attracted interest from carriers, and encouraged the Optical Internetworking Forum to use that modulation technology as its standard. While Nortel has faced heavy competition in this sector from Nokia Siemens, Ekinops, Ciena (CIEN), and Infinera (INFN), the DSP technology it developed for DP-QPSK is probably worth a lot more on its own than it would be buried deep in the MEN business unit.

In order to get anything for its intellectual property, Nortel needs to break out the winners within each business unit rather than trying to bundle them with the also-rans. Just as trying to increase sales by offering more product lines to customers didn’t work, trying to increase sale prices by offering more products to prospective buyers won’t work either.

Disclosure: No positions in any stock discussed here. Some of the companies mentioned here may have purchased published research from my firm, however we do not offer consulting services to individual companies.