WiMAX, Pension Fund, Competition All Contributed to Nortel Problems

By Chris Preimesberger  |  Posted 2009-01-14

WiMAX, Pension Fund, Competition All Contributed to Nortel Problems

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."

Vast Installed Base May Save Company

Despite the Chapter 11 filing, analysts and telecom industry people contacted by eWEEK believe that its vast installed base of customers around the world may end up being the company's saving grace.

The prospect of Nortel dropping out of the business entirely would leave an enormous product/service/maintenance gap in the telecom departments of a large number of Fortune 1000 companies.

"It is a tough economic environment for many, many companies -- Nortel has been working to restructure in this environment, and has simply run out of runway before they got back off of the ground," Henry Dewing, a principal anlayst at Forrester Research who specializes in the telecom market, told eWEEK. 

"Today's actions should allow them to add some distance to that runway."

How long as this been in the works?

"Nortel has been using cash faster than it brings it in for some time," Dewing said. "Financial troubles have come and gone at Nortel since the last bubble burst in 2001, but they have continued to satisfy customers and continue to deliver market leading technology. These assets give them a foundation on which to build a restructured business."

Company may have to sell off some assets

Charles King, principal analyst with Pund-IT, said it's possible that some divisions of the company could be sold off to bring cash to continue operations.

"It depends upon what happens with the company," King told eWEEK. "The $2.4 billion they have in cash is relatively healthy, but with the economic tsunami washing against everybody's shores, I'm not sure how long that will last.

"It might be that they will get rid of under-performing divisions or assets, and try to reorganize around the strongest pieces of the company. I would think that the parts  of the company that make those infrastructure pieces so many Nortel customers depend on would hopefully continue to get support from the businesses that buy those products."

Can the company bounce back into prominence?

"I believe that Nortel still has significant importance across networking and telecom markets," Dewing of Forrester said.

"The enterprise business has been a bright spot in Nortel's operations - and I believe the initiatives they have begun in services with Microsoft/Dell, as well as in enterprise video, will drive revenue and margin growth as these business lines grow and mature at Nortel."

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