Nortel Pulls Another Switch

Nortel (NT Quote) chief Mike Zafirovski turned another page on the company's big turnaround plan.

In an effort to refocus the Toronto telecom titan, Zafirovski moved Monday to spin off the company's blade server switch unit. Menlo Park, Calif.-based buyout shop Garnett & Helfrich Captial acquired Nortel's blade server business Monday. No terms of the deal were disclosed, but Nortel will receive a minority stake in the venture and control one of the four director seats.

The move underscores the difficulty big equipment makers have had trying to find new growth areas as demand for networking gear has dropped. Blade servers were expected to be a booming market as companies traded in older, fridge-sized equipment for faster, denser gear that fit on slide-in component racks.

IBM (IBM Quote) and Hewlett-Packard (HPQ Quote) have dominated the blade server arena. Meanwhile Nortel and rival Cisco (CSCO Quote) have battled as switch suppliers to the two blade server giants. Nortel's exit isn't exactly a shock, and Cisco seems to see more promise in areas such as blade storage, say industry observers.

"We have expected Mr. Zafirovski to tighten up Nortel's strategic focus -- emphasizing business where Nortel is or can be No. 1 or No. 2," CIBC analyst Steve Kamman writes in a research note.

Since his arrival in November, Zafirovski has been quick to put his restructuring blueprint to work. Within weeks of his arrival at the company, Zafirovski cleaned house on previous management. More recently, the former No. 2 executive at Motorola formed a partnership with fast-growing networking player Huawei, moved to settle lingering legal troubles and put a new procurement chief in Hong Kong to help tighten the supply chain.

"This is consistent with our transition strategy," says a Nortel representative. We want to "stick with the business core to our strategy," the rep said.

The new venture will be called Blade Network Technologies and will be based in Santa Clara, Calif. David Helfrich, managing director of Garnett & Helfrich, will serve as chairman, and Vikram Metha, who started the division at Nortel, will stay on as CEO.

The business has 40 employees, and Metha expects to add another 40 workers. He says about half of the staff will be in engineering and service, and a dozen will be in sales.

Nortel shares dropped a penny to $2.95, while phone gear peer Lucent (LU Quote) rose 2 cents to $2.78 in midafternoon trading Monday.