Nortel Implodes

This one's gonna hurt.

Networking and telecom gear maven Nortel Networks (NYSE: NT  ) announced its filing for Chapter 11 bankruptcy protection this morning. Nortel once commanded a market cap of over $100 billion and was one of the largest publicly traded Canadian companies. The stock is now essentially worthless and bond holders have to brace themselves for massive losses on those supposedly valuable papers.

Nortel's $4.5 billion debt load won't make much of a splash by modern standards. Nevertheless, this debt restructuring will have far-reaching effects. Dodge & Cox, formerly Nortel’s largest common stockholder, smelled blood ahead of time and got out of Nortel before the final crash. Most other shareholders are pretty much out of luck, though.

A long, slow turnaround was scuttled by the financial panic of 2008, and relentless competition from stable giants like Cisco Systems (Nasdaq: CSCO  ) and LM Ericsson (Nasdaq: ERIC  ) effectively forced financial insolvency. Maybe Nortel can get back on an even keel under bankruptcy protection and pose a bigger threat to its rivals.

Maybe. But more likely, the likes of Cisco, Nokia (NYSE: NOK  ) , and Ciena (Nasdaq: CIEN  ) will probably chop Nortel up in handy chunks if it can’t engineer a turnaround. They’ll hand off telecom operations in one direction, enterprise networking elsewhere, and so on. It's the corporate equivalent of chopping up a car and selling it part by part. The competitive landscape will change drastically now.

Management says that daily operations will continue unabated, because Nortel announced this so-called "restructuring" (I prefer "implosion") with $2.4 billion of cash left in its pockets. Major parts supplier Flextronics (Nasdaq: FLEX  ) agreed to restructure some of its supply contracts and opt out of others. When all is said and done, Nortel's products and services might live on, but there won't be much of an investment vehicle bearing that name.

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Fool contributor Anders Bylund owns none of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On January 15, 2009, at 12:00 PM, nerd1951 wrote:

    Nortel's collapse, much like Lucent's began long ago with ill-conceived acquisitions of hot technologies at inflated prices. Coupled with that they extended credit to CLECs with bad business models that never turned a profit. This is some of the final fallout of the telecom bubble.

  • Report this Comment On January 15, 2009, at 6:21 PM, nfrengle wrote:

    Nortel are a desperate and directionless company, who still haven't figured out what they want to be when they grow up. Do they want to be a services company? Do they support WiMax or LTE? Do they do IPTV?

    Lately, even their core PBX business has been a pile of sh*t, with the CS1000 being touted as the be-all product, but then not delivering the goods.

    Your story said that Verizon will stay with them. Sure they will--they need spares! But for next generation strategic investment? You can be very sure that for LTE they will be looking elsewhere.

  • Report this Comment On January 26, 2009, at 11:15 PM, st3van wrote:

    Nortel went down the pan 9/10 years ago. Stupid aquisations they knew nothing about, Roth was a fraud, Collins spent thouands on jollies and the co has gone down from $123 to below 8 cents - the justice is like the banks in England someone has to put their hand up and pay back. Incompetence is an understatement. Managers they are not - Collins for one did a runner and quit with a big pay-off. Thaine was his slave etc etc

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