WiMAX, Pension Fund, Competition All Contributed to Nortel Problems
Nortel has $2.4 billion in cash reserves but is saddled with more than $4 billion in debt. It also has been fighting serious financial and market battles for more than a decade -- mainly against heavy-duty competitors such as Cisco Systems and Avaya.Judging by the reaction of analysts and telecom/networking industry people, the Jan. 14 news that Nortel is filing for protection from creditors under Chapter 11 of the U.S. bankruptcy laws was not much of a surprise.
North America's largest telecom infrastructure and unified communications provider made the court filing in both Canada and the United States one day before the Toronto-based company was due to make an interest payment of about $107 million.
Nortel, which has $2.4 billion in cash reserves but is saddled with more than $4 billion in debt, has been fighting serious financial and market battles for more than a decade -- mainly against heavy-duty competitors such as Cisco Systems and Avaya.
The company, along with chipmaker Intel and other companies, also has lost a substantial amount of money investing in WiMAX development over the last eight years. WiMAX, or wireless broadband, has not sold nearly as well as many people had expected.
The amount lost on the project was not disclosed by Nortel, but it is known that its partner, Intel, sunk $950 million in 2008 into its ClearWire WiMAX initiative.
WiMAX (Worldwide Interoperability for Microwave Access), is a telecommunications technology that provides wireless data transmission using a variety of transmission modes, from point-to-point links to portable Internet access. WiMAX provides up to 75 Mb/s symmetric broadband speed without the need for cables.
Joel Hackney, president of Nortel's enterprise solutions business, told eWEEK that the filing means that "the board of directors has decided to deal, once and for all, and decisively, with the cost and debt burden that Nortel has. It hasn't been dealt with in multiple years. This will allow us to effectively restructure our operations, and we're doing it in a way that allows us to restructure the capital balance sheet of the corporation."
Cash reserves can sustain company for a while
Hackney said that the $2.4 billion cash reserves will allow Nortel to "preserve our liquidity and continue to fund operations for customers, in ways that we can maintain the product capabilities and product support they've become accustomed to."
What this means for customers, Hackney said, is that "Nortel is absolutely still very much in business. Many of the clouds, if you will, around Nortel that are well known, that customers have been uncomfortable with, are being addressed directly today with this decision."
Hackney said that the company's debt load, cost of its pension program and general operations are all compounded by the current uncertain economic environment.
"We're taking the action in a period of time in which the company does have liquidity, it does continue to stay in business and provide the ongoing support that customers deserve," Hackney said. "Our customers are by far our No. 1 priority."