Nortel Networks Corp. is almost out of options. A battered economy, a shrinking industry, fierce price competition from emerging Chinese rivals, a bloated balance sheet and weak product lineup have aligned to force the struggling company's hand.
On Monday, president and chief executive officer Mike Zafirovski is expected to announce another round of jobs cuts and office closings, amounting to about 10 per cent of staff, or 3,000 positions. But cost cutting alone will not appease restless investors and analysts.
Mr. Zafirovski has already implemented about $1.5-billion (U.S.) of cost cuts since arriving from Motorola Inc. three years ago. Nortel declined to comment about strategy in advance of its Monday announcement, but in September Mr. Zafirovski said: “A comprehensive review of our business is taking place and we are determined to reshape the company to maximize its competitiveness.”
The company is just one-third the size it was in the tech boom a decade ago. But all the restructurings have proven too little to fix the troubled network equipment maker, and there is now open discussion about the wisdom behind some of Mr. Zafirovski's decisions.
Why, for example, did he wait to start selling assets until September, when the economy had pitched into its worst crisis of a generation? Why would he seek to sell technology that was considered by many to be the best driver of future business? And why would he jeopardize sales by publicly announcing the sale of a unit?
“You don't preannounce the sale of something before you actually sell it,” says Brian Modoff of Deutsche Bank. “It affected business right away. We heard carriers saying we're not going to deal with these guys if it's for sale.”
Numerous companies have expressed an interest in buying Nortel's metro ethernet networks business, which Nortel put on the block in September. The unit, which makes optical gear for delivering multimedia content over local broadband networks, is one of the fastest-growing portions of the company.
But tight credit conditions have only worsened since September and businesses are pulling back spending plans.
“While we initially thought Nortel could potentially sell the MEN business for $800-million to $1-billion, we now believe Nortel either will not be able to sell the business in this current environment or have to accept a materially lower offer on the order of $500-million,” UBS Securities LLC analyst Nikos Theodosopoulos wrote in a report yesterday.
Nortel has a reputation for technical prowess, and to stay afloat it needs a new cycle of innovation to energize business. Unfortunately, it's not clear to anyone in the market what that next product or technology could be.
“We thought at one point their optical business was that, and that's what they're trying to sell, which is what we didn't understand,” Mr. Modoff said.
One of the company's biggest problems continues to be that its costs are too high. In the years since the tech boom, Nortel has failed to adequately bring its costs in line with its smaller size. “They are not sharing half the market with Lucent any more,” said Rick Franklin, telecom analyst for Edward Jones & Co. “Given the debt levels, expense base and market they're in, I'm not sure that there is a way out for Nortel.”
The company is heading toward a liquidity crunch as it burns through cash reserves at a rate of about $700-million a year. At that rate, the company will have only $1.3-billion in cash at the end of 2010, leaving it in “a tenuous position” as $1-billion of debt will be due in July, 2011, Mr. Theodosopoulos noted.
“This is not the time to have a weak balance sheet, to have debt. It's when the strong get stronger,” said Mr. Modoff. “I don't know what the options are for them at this point.”
Mr. Zafirovski has been so distracted trying to clean up the remnants of the company's accounting scandal and cut costs that he has not given sufficient attention to winning new business, critics charge.
When BCE Inc.'s Bell Mobility and Telus Corp. took bids from equipment makers recently to build their joint wireless network overlay, they decided to buy from Nokia Siemens Networks and Huawei Technologies Co. Ltd. long before Nortel came to the table with a decent proposal, says one telecom source.
Kris Thompson of National Bank Financial Inc. has fingered another looming crisis for Nortel, one that has not received much attention. He estimates that with the equity markets in turmoil, Nortel's pension deficit has ballooned to $2.3-billion, almost twice the $1.2-billion reported for the end of 2007. There is a risk the company will need more cash to shore up that deficit, he said.
Mr. Thompson values Nortel at about $3.6-billion based on its revenue last year. When he includes the company's cash reserves, debt obligations and reported pension deficit, the value falls to just $312-million. When he factors in his revised pension deficit amount, the result gives Nortel shares a value of zero.
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