Why Did Nortel File for Bankruptcy Protection?

| About: Nortel Networks (NRTLQ)

With the one year anniversary of Nortel’s (OTC:NRTLQ) bankruptcy filing happening in a couple of weeks, something I’ve been wondering about recently is why Nortel bothered filing for bankruptcy protection in the first place.

At this time last year, Nortel had about $2.5-billion of cash and some assets that could have brought in some much-needed financial stability given the economic climate and the uncertain spending plans of carriers and cablecos. Although CEO Mike Zafirovski apparently was against the idea of bankruptcy protection, the board aggressively pushed for it.

Six months later, Nortel decided to abandon ship by announcing it planned to sell all of its assets rather than use bankruptcy protection to restructure, close plants, lay off employees and reduce much of its $4.5-billion of debt. If done properly, Nortel might have emerged from bankruptcy as a smaller, more focused, viable company with a portfolio that included optical, VoIP, carrier products.

In hindsight, it was a strange decision. The only way to explain it is that the board panicked. Spooked by the volatile economic conditions and likely bullied by debt and bond holders, the board took the easy way out by pulling the trigger on the asset sale. In the process, it decided to kill Canada’s flagship high-tech company.

It would be fascinating to know why the board decided to throw in the towel so quickly and easily. For Canada and Nortel employees, why didn’t board decide to fight the good fight? Sure, debt and bond holders might not have got their pound of flesh but Nortel might have survived to live another day rather than feebly raise the white flag.

The last decade for Nortel was a disaster on many fronts – terrible strategic decisions, misguided acquisitions, an accounting scandal that cost it billions of dollars, a board that had little telecom experience, and a string of CEOs who had no vision about what Nortel could have become.

If there’s a silver lining, it’s that the assets that were happily purchased by Avaya, Ciena (NASDAQ:CIEN), Ericsson (NASDAQ:ERIC) and Hitachi (HIT) have found good homes, and that the thousands of employees who worked for those business units will continue to be employed. As well, maybe all the ex-Nortel employees will start their own companies or bolster the efforts of new companies. Finally, Nortel’s sad story will provide MBA students will lots of great studies to learn how not to manage a world-class company.

To illustrate Nortel’s puzzling bankruptcy protection process, here’s a video featuring Zafirovski after the company filed for protection from creditors. It starts with Mike Z. proclaiming “Ultimately, I believe this process will enable Nortel to become a more focused, financially sound and competitive company.” So, what happened, Mike?

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