Another Mighty Telecom Failure

Nortel's bankruptcy stings Canada, but it benefits rivals Cisco and Juniper.

Nortel, the networking giant that represented Canadian telecom supremacy for more than a century, is now in "bankruptcy protection, laid low by financial struggles and the current recession.

At one time Nortel represented at least a third of the total value of the entire Toronto Stock Exchange. It's got $2.4 billion to fund operations with while it reorganizes under Chapter 11 in the U.S. but it's a far cry from the $366 billion value it once held.

There was a time when no Canadian equity mutual fund was complete without a stake in Nortel. Back before the breakup of the Bell system, when people weren't allowed to own their own telephones, you rented phones manufactured by Nortel (then known as Northern Telecom). Nortel is literally woven into the fabric of Canada.

So what happened? A lot fell apart for Nortel in 2001 when the telecom bubble, built up with the dot-com bubble, went bust. Then came a lengthy accounting scandal that further depreciated the value of Nortel and tarnished its image.

Downward Spiral

Despite the best efforts of new technology innovations and new leadership, the downward death spiral for Nortel that began in 2001 finally culminated in the formal bankruptcy filing. How the mighty have fallen!

Had Nortel moved more quickly to clean up its balance sheet after the accounting scandals, things might have worked out differently. Then again, competition in the post 2001 period changed for Nortel, too.

Networking vendors Cisco and Juniper both emerged as true rivals and both were unencumbered by the financial scandals that likely rocked customer confidence in Nortel.

Things started to look up for Nortel in 2005, when Nortel hired Mike Zafirovski as CEO. But Nortel's losses kept on.

It's clear from its balance sheet that, although Nortel can claim technological superiority in plenty of areas, it wasn't enough to save it from bankruptcy. They include a high speed networking unit that reached 40Gbps and now 100 Gbps, becoming the networking standard for carriers around the world.

Nortel has also been at the forefront of unified communications, which it offers in partnership with Microsoft. Virtualization is a hot technology and Nortel has been active.

Good technology alone has not been enough to save Nortel, apparently the depth of its financial mismanagement was simply too great to overcome.

 Picking Up the Pieces

Certainly with bankruptcy protection, Nortel will attempt to restructure its business to generate some free cash. Bit ultimately what that is the breakup of Nortel as we know it.

Who will buy Nortel's assets? In this economic climate, who knows? I suspect that a firesale is likely. With Nortel's Metro Ethernet business up for grabs, it might make for an interesting acquisition for either Cisco or Juniper, both of which are fighting for the same customers.

On the unified communications front, Nortel's assets would also be attractive to Cisco and Juniper, though Avaya which is now privately held, could be an interesting suitor as well. Then again, owing to its partnership with Microsoft, perhaps it might represent an interesting opportunity for Microsoft to jump deeper into the hardware business.

On the networking assets, Nortel's equipment might represent an interesting opportunity for HP's ProCurve business unit, though there are likely to be other interested parties as well.

Regardless of who ends up owning what piece of Nortel, one thing is likely certain and that is that the sold of pieces will go to interests outside of Canada.

Canada the birthplace of the telephone itself has thanks to Nortel in its various naming incarnations, been a bastion of innovation in telecommunications for over a hundred years. Though the bankruptcy filing does not spell the end of Nortel, it is without a doubt the darkest chapter in Nortel's history and a dark day for the Canadian telecom industry.

Though Nortel's collapse is a great Canadian tragedy, Canada's telecom industry does have another star that has emerged strongly since 2001. Research in Motion and its Blackberry devices are widely popular around the world. It's too bad that Nortel did not invent the Blackberry as that might have helped to change Nortel's fortunes.

The true lesson in all of this though is simple. It is execution as well as prudent financial management that is the key to the success of a technology business. It's a lesson that Nortel is learning the hard way.

(Sean Michael Kerner is a senior editor for and proudly hails from Canada.)

TAGS: telecom,virtualization,carriers,Nortel,bankruptcy

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