Toronto: Nortel Networks Corp. spent years ringing up multiple rounds of layoffs as it tried to fix big problems in its business. But it couldn’t ward off the recession.
The telecommunications equipment maker 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. The filing came a day before Nortel was due to make a debt payment of $107 million.
Facing a sharp drop in orders from phone companies, Nortel used the bankruptcy filings to buy time to explore restructuring options like selling off assets. Some help already is coming from the Canadian government.
The 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 Wednesday its cash position remains $2.4 billion, but it did not immediately reveal its total assets or its debt load.
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.
After the dot-com bust, Nortel had problems of its own: an accounting crisis that sparked shareholder lawsuits, regulatory investigations and the firing of key executives, including CEO Frank Dunn. By the time stock trading closed Tuesday, before the bankruptcy filing, Nortel’s market value was just $155 million. Its work force was down to about 26,000 people.
Canadian industry minister Tony Clement said the government is willing to help Nortel restructure as a viable company by providing up to $24 million in short-term financing and is open to discussing other loans.
Even so, analysts were pessimistic about Nortel’s prospects.
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,” CreditSights analyst Ping Zhao said in a recent interview.
Lisa Pierce, an analyst with Forrester Research, said Wednesday that Nortel now can expect to lose more business to competitors like Cisco Systems Inc. and China’s Huawei Technologies Co., which already have been gaining share.
Then again, 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.”
It marks a humbling comedown from a storied history.
Nortel was founded as Northern Electric and Manufacturing in 1895, supplying equipment for Canada’s telephone system. The company pioneered digital network switches in the 1970s and grew into a major telecommunications supplier after the US breakup of AT&T in 1984 expanded competition in the industry.
By 1997, the year John Roth took over as chief executive, Nortel had become the world’s second-largest telecommunications gear maker behind AT&T spinoff Lucent Technologies.
Roth led the company into the wireless and Internet communications markets as the dot-com craze drew vast investment in fiber-optic networks.
“Nortel was going through that mega-growth stage and on paper it was the right move,” said Ronald Gruia, a Frost & Sullivan analyst who worked for the company for 4 1/2 years before leaving in 2001.
But like many observers, Gruia said Nortel grew too quickly, overpaying for acquisitions with its inflated stock. He pointed to Nortel’s $2.1 billion purchase of Clarify Inc. in 1999. The company was supposed to provide a “second wave” of so-called e-business technology, helping businesses and customers interact. Instead Nortel sold the unit to Amdocs Ltd. in 2001 for only $200 million.
By that time Nortel was bleeding revenue as the dot-com bubble burst and spending on network gear vanished. Nortel lost $27 billion in 2001.
In 2004, the US Securities and Exchange Commission launched a formal investigation into Nortel’s financial statements. The agency accused Nortel of manipulating its books in 2000, 2001 and 2003 to make it appear the company was holding up better during the technology implosion.
Beginning in 2002, Nortel also fudged numbers to meet financial analysts’ expectations in quarterly earnings reports, the SEC charged. Nortel eventually came to a $35 million settlement in the case in 2007.
It is unclear what Nortel’s bankruptcy will mean for its sponsorship of the 2012 Summer Olympics in London. Nortel committed last July to providing about £40 million ($58 million) in cash and communications infrastructure.
Nortel also is a sponsor of the 2010 games in Vancouver, British Columbia, but officials there said Nortel had already met many of its commitments and reaffirmed it would meet its future obligations by May.