How Long Can Northern Telecom Limited Survive Finance Essay

Nortel Networks is a telecommunication equipment manufacturer. Its corporate life in 1895, Nortel produce the traditional phone in Canada, as few years after Alexander Graham Bell invented the telephone. Originally part of the Bell Telephone, it morphed into Northern Telecom and finally Nortel.

Figure 1: The telephone that born in Canada, 1894

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Major changes began at Nortel in 1997 as John Roth was elected to be the new CEO. He figured out that the market of telecommunication is shifting from voice to the internet. One of their great inventions is the frame-relay network equipment that has been used all over the world. In Malaysia, Telekom Malaysia has using the equipment for more than 10 years. It also was being used by the multinational companies, banks and insurance firm.

But what happen now, most of the equipments are already at the end of life, and many firm have been migrated to other networking technologies. Nortel equipments are not compatible with the new technologies. Because of that, many carriers are using the other equipment produced by the competitors and Nortel’s sales are decreasing.

Unlike other companies, notably airlines, that have used bankruptcy protection to renew their businesses, Nortel, which began this decade as one of the world’s largest makers of telecommunications equipment, is probably headed for liquidation, several analysts said. "I don’t think it’s going to exist," said Mark Sue, an analyst with RBC Capital Markets, a unit of the Royal Bank of Canada. Incident that happens to Nortel would be one of the biggest failures in the telecommunication industry.

Nortel had produced much of the fibre optic equipment that now carries most of the Internet’s data during 1990s. Nortel’s misery went beyond finances. In the market for interworking devices, Juniper and others proved to be more innovative and can perform better. Nortel have to file for court protection just a day before the due to make the debt payment for about US$107 millions. By doing so, it give the company more chance to look for the restructuring options or sell off their assets.

Nortel said in a release that it had been in the process of a turnaround since late 2005, but "the global financial crisis and recession have compounded Nortel’s financial challenges and directly impacted its ability to complete the transformation." "Nortel must be put on a sound financial footing once and for all," the president and chief executive, Mike S. 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."

Tragedies that happen to Nortel make their customers queries about the continuity of support from the company. Nortel’s competitors try to exploit that uneasiness by offering Nortel customers attractive deals to the alternative equipments. It is also unclear if Nortel will be able to sell any of its operating units to raise cash for a corporate revival.

Nortel’s US$4.5 billion in debt is largely from the result of an acquisition spree by the company during the 1990s. The government of Canada offered Nortel some support. Export Development Canada, a government-owned bank and insurer, has agreed to provide the company with up to US$30 million in loans for the next 30 days.

Currently, Nortel is obtaining further extension of stay under the Companies’ Creditors Arrangement Act. The stay of proceeding was granted by the Canadian Court for further extend to October 29, 2010. The reason of doing that is to provide stability to the company to continue with their divestiture and other restructuring efforts.

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INTERNET BUBBLE

The internet bubble or sometimes called "IT bubble" was a provisional bubble happening between 1995 and 2000, with a climax on March 10, 2000 (refer to Figure 1). During that time, stock markets in industrialized nations saw their equity value rise rapidly from growth in the more recent Internet sector and related IT fields.

Figure 1: The technology-heavy NASDAQ Composite index peaked at 5,048 in March 2000, reflecting the internet bubble

In order to be aggressive in market, Nortel made big investment in high-speed fibre optic system in 1993 and leading the industry. In the late 1990s, Nortel grew for about 100% per annum. The company wanted to dictate the rising market for networking. This had to be done by trying to renovate the old technology to a modern Internet Protocol technology based firm, but those skills were beyond the Nortel’s expertise.

Nortel pay an enormous price for acquiring Bay Networks in 1998 to obtain these skills. It also bought Alteon Websystems for US$7 billion, even though the firm had revenue for only US$200 million; the price must be regarded as expensive. As the internet uprising created substantial growth in fibre optic equipment, Nortel grew rapidly and so did its stock. At its height, Nortel accounted for more than a third of the total valuation of all the companies listed on Toronto Stock Exchange. It has expanded rapidly and entered the new markets.

Thought the company paid a huge price for these acquisitions, it failed miserably in integrating them and transforming its business into IP routing. As a large and old firm, Nortel never really embraced the IP shift in the marketplace and then the market bubble burst in 2000 and 2001. The recession was particularly hard on companies like Nortel, which had paid excessive prices for firms which were never really absorbed. Nortel had paid US$2.1 billion for Clarify Inc. in 1999, but this firm was sold in 2001 for only US$200 million. In the bubble years, Nortel had about 95,000 employees, but 60,000 of them being fired due to its financial crisis.

Figure 2: Nortel performance

LIQUIDATION

Nortel was the first giant in the technology industry that facing bankruptcy issue during this global downturn. On January 14, 2009, Nortel filed for protection from creditors, in the United States under Chapter 11 of the United States Bankruptcy Code, in Canada under the Companies’ Creditors Arrangement Act, and in the United Kingdom under the Insolvency Act 1986. Nortel had an interest payment of $107 million due the next day, approximately 4.6% of its cash reserves of approximately $2.3 billion.

The share price for Nortel fell more than 79% on the Toronto Stock Exchange after the announcement. A government agency in Canada, EDC had agreed to provide up to C$30 million in short-term financing through an existing bonding facility, however the Canadian government resisted characterizing its position on Nortel as a bailout.

Nortel initially hoped to re-emerge from bankruptcy, so that it paid out retention bonuses to almost 1,000 of their top executives, totalling up to US$45 million, drawing criticism as the company withheld severance payments to employees laid-off prior to the creditor protection filing.

The worsening recession and drop in stock markets deterring potential companies from bidding for Nortel’s assets, and many of Nortel’s major customers reconsidering their relationships with the restructuring company. In June, 2009 Nortel announced that it no longer planned to emerge from bankruptcy protection, and would seek buyers for all of its business units. After announcing it planned to sell off all of its assets, Nortel shares were delisted from the Toronto Stock Exchange on June 26, 2009 at a price of US$0.185 per share, down from its high in 2000 when it comprised a third of the S&P/TSX composite index. 

Nortel handed out US$14.2 million in cash compensation to seven executives in 2009. Nortel also paid out US$1.4 million to 10 former and current directors, and paid US$140 million to lawyers, pension, human resources and financial experts helping to oversee the company’s bankruptcy proceedings.

In February 2010, Ernst & Young, the court-appointed monitor of Nortel’s Canadian bankruptcy proceedings, reported that the assets of Nortel’s Health and Welfare Trust had a shortfall of US$37 million in its net assets as of December 31, 2008. The trust supports pensioners’ medical, dental and life insurance benefits, as well as income support for some groups such as long-term disability recipients.

CRITISM & CONTROVERSY

In 2003 Nortel have paid US$10 million in so-called "return to profitability" bonuses, largely to the selected group of their top management. The "return to profitability" was a fabrication that achieved by the release of US$490 million in reserves to boost earnings.

There was criticism to Nortel since the company suspended the unemployment payment to employees laid-off prior to the creditor protection filing. When Nortel entered protection from creditors’ proceedings in 2009, it paid out the retention bonuses to almost 1,000 top executives, totalling up to US$45 million. The company also make additional thousands of lay-off without severance, and the pension fund remained underfunded, but it can pay US$14.2 million in cash to seven executives. Nortel also paid $1.4 million to ten former and current directors, and paid $140 million to lawyers, pension, human resources and financial experts helping to oversee the company’s bankruptcy proceedings.

Figure 3: Nortel pensioner line up for an information session

Nortel proposed to spend US$92.3 million on retention bonuses for 1,475 employees in its Nortel Business Services and Corporate groups, in the United States court filing on February 11, 2010. Christopher Ricaurte, the president of Nortel Business Services, will receive US$2.5 million in incentives according to the plan. In all, Canadian employees are eligible for US$27 million, United States employees getting US$55 million, and about US$10 million will go to others. This proposed plan came the same week Nortel negotiated a US$57 million deal to wind up health care and other benefits for former Canadian employees. Claiming that the retention bonuses proposal is extraordinary, acting US trustee, Roberta DeAngelis, objected to the payment of US$555.6 million to 866 employees. However, court appointed representatives for Nortel former employees, who are creditors in the Ontario bankruptcy court, have signed an agreement to not oppose any employee incentive program.

The U.S. Securities and Exchange Commission (SEC) and the Ontario Securities Commission (OSC) have announced the legal proceedings against Frunk Dunn, the former CEO of Nortel and three other former senior executives in March 2007. The SEC accused the four of civil fraud relating to Nortel’s accounting and its restatements. While, the OSC alleged that Dunn and two others broke securities laws by making "material misstatements".

CONCLUSION

As we entered the new millennium, corporate distress and bankruptcy were no longer a niche area of corporate evolution. Indeed the bankruptcy rate of U.S. corporations reached record proportions in 2001/2002, with as many as 77 large corporation filing for protection under Chapter 11 of the bankruptcy code with liabilities more than US$1 billion.

Telecommunication firms "lead" the way, followed by the airlines, steel companies and so on. Bad financial management is one of the Nortel’s problem, but the root cause to the bankruptcy is Nortel not succeed to evolve with their customers’ changing needs. Nortel was actually very good at develop and anticipating industry change from 1970s to 1990s, but it failed to address the single dominant change after that. The commoditization of technology brought on by the Internet Protocol technology and the appearance of Chinese competitor like Huawei worsen the problem. Telecommunication operators are looking for the cheaper equipment, so that they can compete with others.

There are many telecommunication suppliers nowadays and each company has the business strategy to survive in the industry. All of them have the distinctive business strategy to ensure their continued existence. But, Nortel is at the other side as it cannot cope with what the market need. Current demands for the telecommunication equipment are the one that hi-tech and reliable. However, the price usually becomes the first priority in the selection.

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