What Went Wrong at Nortel

The demise of Canadian telecom giant Nortel Networks ( NT) should serve as a stark warning to other tech firms struggling through the economic downturn.

The troubled equipment maker, which has been in Chapter 11 since earlier this year, announced plans to liquidate last month, signaling the beginning of the end for the 127-year old company.

Nokia Siemens Networks has already agreed to buy part of Nortel's wireless business for $650 million, and the Canadian firm plans to sell off the rest of itself.

Nortel's downfall was certainly exacerbated by a high-profile accounting scandal and a subsequent culling of senior management, but the firm's failure is also one of bad planning and execution.

Not so many years ago, Nortel was part of a pantheon of telecom equipment providers that included Cisco ( CSCO), Alcatel and Lucent. The Toronto, Ontario-based firm was one of the top suppliers to the Internet building boom at the turn of the century but was later crushed after the bust when the industry was left with an oversupply of telcos and network capacity.

Core aspects of Nortel's strategy, however, still left much to be desired.

"From an M&A perspective, Nortel had a very poor execution record," Ronald Gruia, principal telecom analyst at Frost & Sullivan, told TheStreet.com.

In 1999, for example, Nortel bought Customer Relationship Management (CRM) specialist Clarify for $2.1 billion in stock, only to offload it to Amdocs ( DOX) for $200 million cash two years later. And let's not forget switch giant Alteon WebSystems, which was acquired for a whopping $7.8 billion in 2000. Israeli network specialist Radware ( RDWR) snapped up Nortel's Alteon switch business earlier this year in a deal rumored to be worth just $20 million.

As any CEO will tell you, acquiring a company is only one half of the M&A battle. Integrating new staff, systems, and products can stretch even the most successful firms. If you are going on a spending spree, à la Nortel, you have to be able to deal with the consequences.

Nortel has also been heavily criticized for spreading its resources too thin, as opposed to forging leadership around a specific technology. Whereas Cisco has successfully hammered areas such as wireless LAN switching, Nortel has come under fire for its broad product portfolio.

Former Motorola ( MOT) executive Mike Zafirovski was parachuted in to save Nortel in 2005, but has presided over its death throes. The CEO recently told Canadian lawmakers that the credit crunch precipitated Nortel's descent into bankruptcy protection, although the firm had been wrestling with plummeting sales well before its Chapter 11.

Zafirovski was undoubtedly dealt a difficult hand when he took over Nortel, but at least one analyst thinks that he could have played a more pragmatic game.

"He could have sold pieces of the company off earlier," said Vanessa Alvarez, also of Frost & Sullivan. "Now they are going for a firesale, but they could have got some decent value."

There have already been rumblings of discontent about Nortel's yard sale. The sell-off to Nokia Siemens Networks reportedly been opposed by a group of Nortel creditors and suppliers.

Despite its many problems, Nortel's technology still has plenty of advocates. The equipment manufacturer, for example, is the second largest supplier of Code Division Multiple Access (CDMA) infrastructure in the world, and is widely used by Verizon Wireless.

Against this backdrop, it will be interesting to see how Nortel sells off some its juiciest assets. The firm may even keep hold of some of its patents for the Long Term Evolution (LTE) technology used in 4G networks, according to the Light Reading web site, possibly to eke out more revenue during the coming months.

Nortel, of course, is not the only company with problems. Rival Alcatel-Lucent ( ALU), for example, recently reported its ninth consecutive quarterly loss. Despite weak demand and stiff competition, however, Alcatel-Lucent is unlikely to follow Nortel's path.

"I think that Alcatel-Lucent is a lot more resilient," said Alvarez. "They have a strong service provider side and a strong services business."

Consolidation, rather than bankruptcy, will characterize the tech market during the next few years, as big-name firms seek out cut-price deals.

Nortel's fall from grace may not have generated as many headlines as General Motors ( GMGMQ) and Chrysler during the last few months, but it should serve as a warning to other tech firms looking to survive the recession in one piece.

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