Toronto: Telecommunications equipment maker Nortel Networks Corp. filed for bankruptcy protection in Canada and the US on Wednesday, becoming the first major technology company to take that step in this global downturn.
Facing a sharp drop in orders from phone companies, Nortel filed for court protection a day before it was due to make a debt payment of $107 million. Protection from its creditors would give the company more opportunities to explore restructuring options or sell off assets. Some help already is coming from the Canadian government.
The long-struggling Toronto-based company said in a release that it had been in the process of a turnaround since late 2005, but the global financial crisis and recession have compounded Nortel’s financial challenges and directly impacted its ability to complete this transformation.
“Nortel must be put on a sound financial footing once and for all,” Nortel’s chief executive, Mike Zafirovski, said in the statement.
As of its last quarterly filing, Nortel had $4.5 billion in debt and $2.4 billion in cash. Nortel said on Wednesday that its cash position remains $2.4 billion, but it did not immediately reveal its total assets or its debt load.
The filing in Delaware revealed that The Bank of New York Mellon Corp. is a trustee on nearly $4 billion of debt. Nortel’s other creditors include the contract manufacturer Flextronics International Ltd.
During the 1990s telecom and Internet boom, Nortel had more than 95,000 employees and a market capitalization of $297 billion. At one point in 2000 it accounted for one-third of the market value on the entire Toronto Stock Exchange.
When trading closed on 13 January, before the bankruptcy filing, Nortel’s market value was just $155 million. Its work force was down to about 26,000 people.
Trading resumed late Wednesday morning and the stock dropped 66% in Toronto.
Nortel has been attempting to recover for years from an accounting crisis that sparked shareholder lawsuits, regulatory investigations and the firing of key executives, including CEO Frank Dunn.
Nortel spokesman Mohammed Nakhooda declined to comment on what assets Nortel will now try to sell off. It is also unclear what the bankruptcy will mean for Nortel’s sponsorships of the 2010 Olympic Winter Games in Vancouver and the 2012 Games in London.
Canadian Industry Minister Tony Clement said that the government is willing to help Nortel restructure as a viable company. Clement said the government has already agreed to provide up to $24 million in short-term financing and is open to discussing other loans.
“The government of Canada appreciates the importance of the telecommunications industry to our economy,” Clement said in a statement.
Since Nortel acknowledged in December that it was considering a bankruptcy filing, analysts have split over the wisdom of it.
“They would gain very little out of the bankruptcy filing and lose a lot,” CreditSights analyst Ping Zhao said in a recent interview. Given the long-term service contracts associated with telecommunications network equipment, you have to really convince your customers that you’re going to be around.
On the other hand, without protection from creditors, Nortel faced a shrinking pool of options. The recession hit information-technology spending worldwide, and frozen credit markets made it more difficult to sell off business units to raise cash. The company has yet to find a buyer for its Metro Ethernet unit, which it has been shopping since September.
In the meantime, some customers have been delaying orders from Nortel as the company’s viability has come into question, UBS analyst Nikos Theodosopoulos said.
“Nortel has enough cash to run its business this year and probably a good part of next year as well,” he said. But he added that a bankruptcy would give the company a better chance to preserve itself.
This is what Matthew Wray, spokesperson, Nortel Asia had to say in response to the questions below:
Will this have an impact on your India operations?
Our affiliates across Asia, including India, are not included in these proceedings and are expected to continue to operate as normal. We remain fully committed to supporting our customers, all our stakeholders and our R&D investments in India and around the world through this process. No announcements were made today regarding strategy.
Have you got enquiries from your Indian customers on the status of the work they do with you?
We have been – and continue to be – in active communication with all our customers in India and globally. The process we announced today is designed to translate our improved operational efficiency, double-digit productivity, focused R&D and technology leadership into long-term success. Nortel is dedicated to delivering world-class solutions and services to our customers.
How many Indian vendors do you outsource?
We have strong ongoing relationships with many vendors across India. No announcements were made today regarding strategy.