Skip to main content

Updated from 11:15 a.m. EST

Beleaguered telecom equipment manufacturer

Nortel Networks

( NT) has filed for

bankruptcy protection

in a last-ditch attempt to put its


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


from the NYSE.

TheStreet Recommends

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.

Nick of Time for Nortel

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


( 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


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."

Nortel Off the Hook for Now

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


(RDWR) - Get Radware Ltd. Report


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


its metro Ethernet networks divison in September and is also rumored to be carving off more of its business.





Nokia Siemens

(NOK) - Get Nokia Oyj Sponsored ADR Report


Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

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's Losses Mount

Nortel, which competes with Cisco,



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.

There have been examples of slimmed-down companies successfully emerging from bankruptcy protection, such as

Silicon Graphics

( SGIC), which spent a few months in Chapter 11 in 2006. Nortel's bankruptcy, however, would coincide with a time of massive economic uncertainty, which could hamper its efforts.

Businesses affiliated with Nortel also were taking a hit Wednesday.


(FLEX) - Get Flex Ltd. Report

, for example, issued a statement Wednesday saying the company was developing a "risk-mitigation plan" regarding its relationship with Nortel and hired Blackstone Group as an advisor. Flextronic shares were off 13.3% to $2.60 in afternoon trading.

"Flextronics has been working to reduce its exposure to Nortel for some time now," Chief Executive Mike McNamara said in a statement.

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