Nortel's Road to Bankruptcy

Rising debt and dwindling cash flow make Chapter 11 a wise move for Nortel. But could CEO Zafirovski have done anything to avoid this fate?

By Roger O. Crockett

As a long-distance runner, Mike Zafirovski is used to daunting challenges. An Ironman triathlete unafraid of long, hard slogs, the CEO of Nortel Networks (NT) knew when he took the job back in 2005 that turning around the struggling Canadian telecommunications equipment maker would be no easy task. But you can bet Zafirovski never expected the road, however bumpy, would lead to bankruptcy.

Yet that's exactly where Mike Z., as he's known, has found himself. Nortel, the largest North American maker of telecom gear, said on Jan. 14 it had filed for bankruptcy protection in Canada, the U.S., and Europe.

The Toronto-based company said it still has enough cash to continue operating while the bankruptcy plays out. However, diminishing demand for phone equipment and stiff competition battered Nortel, while the global financial crisis that accelerated in the fourth quarter made it harder for companies like Nortel to restructure loans. "The world changed dramatically in September," Zafirovski says in an interview with BusinessWeek. "So we needed to preserve the balance sheet…and to ensure that we were on sound financial footing for the long term."

Zafirovski spent the day holding meetings and conference calls with staffers and customers trying to explain the decision and salvage some hope for the future. With the cash on hand, Zafirovski expects Nortel to continue meeting demand, supplying equipment for orders and making further sales. Behind the scenes, he's working to hash out a plan that would have the company emerge from bankruptcy operating smoothly. "We're not making any announcements now about our strategy, but we are providing confirmation to our customers," he says.

Burning Through Cash

Whatever its condition upon emergence from bankruptcy, Nortel is in rough shape going in. Once the darling of Canadian business, with $30 billion in revenue, Nortel had recently become a $10 billion shell of its former self. The company is saddled with mounting debt and dwindling cash flow. The company would have hit a cash crunch by the end of 2010, said UBS (UBS) analyst Nikos Theodosopoulos. Nortel had $2.6 billion in cash at the end of the third quarter, and by some analyst estimates has been burning through about $300 million to $400 million in cash a quarter. "It was better to file [for bankruptcy] now with cash on hand than wait until they were under more pressure," Theodosopoulos says.

Zafirovski was hired because he was perceived to be the sort of change agent needed to return Nortel to its former glory. An alum of General Electric (GE) and one of the few executives credited with wringing profits out of Motorola's (MOT) ill-performing phone unit in recent years, Zafirovski was thought at least to have the skills for turning around a company that had long suffered from declining sales and managerial upheaval.