Technology

Nortel Files for Bankruptcy


Plunging demand for phone gear and a global financial crisis finally caught up with Nortel Networks (NT). The largest North American maker of telecommunications equipment said on Jan. 14 that it's filing for bankruptcy protection in Canada, the U.S., and in Europe.

The company said it would seek creditor protection under the CCAA process in Canada and Chapter 11 bankruptcy proceedings in the U.S. Filings in Europe were to be forthcoming. The company said it had sufficient cash on hand—$2.4 billion—to fund ongoing operations, and the company's business would continue without interruption. Affiliates in Asia, the Caribbean, and Latin America are not included in the filing.

Under Chief Executive Mike Zafirovski, the company embarked on an ambitious turnaround in 2005 that involved selling off businesses and eliminating jobs.

But as the recession took hold, customers delayed telecom gear purchases, sending Nortel's sales into a tailspin. Competition from rivals including Huawei also took a toll. "Nortel must be put on a sound financial footing once and for all," Zafirovski said in a statement. "These actions are imperative so that Nortel can build on its core strengths and become the highly focused and financially sound leader in the communications industry."

Bankruptcy by Choice

Nortel had $2.6 billion in cash and $4.5 billion in debt at the end of September and has been burning about $300 million to $400 million in cash per quarter, says Nomura analyst Richard Windsor. The company might have been able to "stumble along for about a year or two" before being forced into bankruptcy, he says. "This action has not been forced. The idea is to do something decisive rather than be broken up and sold off at extremely distressed valuations."

Nortel had been one of the highest fliers during the Internet boom of the past decade. As people flocked online and companies set up operations on the Web, the amount of Internet traffic soared and demand for Nortel's gear looked headed for years of strong growth. In 2000 the company's market capitalization topped $300 billion, making it one of the most valuable companies in the world. Author George Gilder featured the company in his 2000 book Telecosm: How Infinite Bandwidth Will Revolutionize Our World.

Nortel was also a longtime pillar of Canadian business, with the kind of prominence that BlackBerry maker Research In Motion (RIMM) enjoys today. The company was once co-owned by AT&T (T) and Western Electric, but the U.S. shareholders had to sell out to Bell Canada as part of an antitrust settlement 50 years ago. Nortel, formerly called Northern Telecom, eventually became independent of Bell Canada and evolved into a giant telecom equipment supplier.

Giles is editor of BusinessWeek.com's Technology & Science channel, based in Silicon Valley. Hesseldahl is a technology writer for BusinessWeek.com in New York. With Peter Elstrom in New York.


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