Nortel Seeks Bankruptcy Protection

Beleaguered telecom equipment manufacturer Nortel Networks (Stock Quote: NT) has filed for bankruptcy protection in a last-ditch attempt to put its troubled house in order.

Nortel's bankruptcy petition comes just a day before the firm was due to repay a $107 million interest debt on bonds and follows months of speculation about the company's future.
The Toronto, Ontario-based firm's stock has plummeted recently amid falling sales and was even threatened with delisting from the NYSE.

The company's stock plunged even further in pre-market trading Wednesday, tumbling 77% to 7 cents.
Nortel will now seek creditor protection under the Companies' Creditors Arrangement Act (CCAA) in Canada, and its American subsidiaries have filed for Chapter 11 with the U.S. Bankruptcy Court for the District of Delaware. Some of the firm's European subsidiaries are also expected to file for bankruptcy, according to Nortel.

"Nortel must be put on a sound financial footing once and for all," explained the company's president and CEO Mike Zafirovski, in a statement early Wednesday. "I am confident that the actions we're announcing today will be the fastest, most effective means to translate our improved operational efficiency, double-digit productivity, focused R&D and technology leadership into long-term success."

The application under the CCAA will be heard later today by the Ontario Superior Court of Justice, although Nortel says that its day-to-day operations should continue without interruption.

The bankruptcy filing comes just a month after Nortel was granted a 30-day waiver by its largest creditor, Export Development Canada, and four months after the company, scrambling for cash, said it was seeking buyers for some of its key businesses.

But these recent moves only proved to be futile attempts to save a broken company from financial collapse.

Nortel 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.

Under CEO Frank Dunn, Nortel's attempts at a recovery were further undercut in 2003 by an executive bonus scheme built on bogus earnings figures. The scandal swept out nearly all of Nortel's executives and board members and led to the hiring of Mike Zafirovski, fomer No. 2 at Motorola (Stock Quote: MOT).

Zafirovski led several staff cuts and product consolidation efforts, but never managed to set Nortel on solid footing.

"The sector is tough, and it didn't help that new entrants became aggressive with price," says RBC analyst Mark Sue. "Nortel's filing is a sad end, and it highlights the challenges of the sector and how the company never recovered after its accounting scandal. In the end, Nortel's demise was its own undoing."

Bankruptcy may at least offer Nortel some respite from the rumor-mill, according to Catharine Trebnick, senior research analyst at Avian Securities.

"Chapter 11 might finally end all the 'what's going on,' " she says. "I think that it could be good in that it will end the speculation and they can get on with their business."

Rumors also have continued to swirl about the sale of some of Nortel's assets during recent weeks, with Israeli network specialist Radware (Stock Quote: RDWR) reportedly poised to buy part of the company for between $30 million and $50 million.

Nortel, which has been wrestling with plummeting sales of its wireless gear, announced plans to divest its metro Ethernet networks divison in September and is also rumored to be carving off more of its business.
Ericsson, Huawei, Nokia Siemens (Stock Quote: NOK) and Cisco Systems (Stock Quote: CSCO) have all been cited as possible purchasers of Nortel's Ethernet networks division, which could be priced anywhere from $500 million to $1 billion, according to analysts and media reports.

Last month, Toronto's Globe & Mail reported that Nortel has received three separate offers that are close to $1 billion, although the company declined to comment on the report.

Nortel, which competes with Cisco, Alcatel-Lucent (Stock Quote: ALU) and Motorola, posted a $3.4 billion loss in its recent third-quarter results. Revenue fell 14% to $2.32 billion and the company said it plans to cut 1,300 jobs in an attempt to boost its business.

The networking giant aims to use Chapter 11 to "deal decisively" with its cost and debt burden, according to the company's statement. Nortel will also undertake more restructuring and narrow its strategic focus "in an effective and timely manner", it said, which suggests that the firm is keen to avoid a fire-sale of its assets.

Despite its problems, Nortel still has $2.4 billion in cash, according to its statement released Wednesday.

If you liked this article you might like

The Confidential Insurgent: Is IBM a Realistic Target for Activists?

The Confidential Insurgent: Is IBM a Realistic Target for Activists?

Meet Jim Cramer Tonight!

Meet Jim Cramer Tonight!

5 Dumbest Things on Wall Street: April 3

5 Dumbest Things on Wall Street: April 3's CEO to Leave Company's CEO to Leave Company

JPMorgan, Citi Suspend Foreclosures

JPMorgan, Citi Suspend Foreclosures