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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