Nortel Networks Corporation
could have major implications for the other tech stocks as investors weigh the impact of the equipment manufacturer's
Despite Nortel's promise to continue its day-to-day operations without interruption, networking rivals
( MOT) are likely looking to benefit from the Canadian company's Chapter 11 filing.
With Nortel embroiled in sorting out its problems, firms such as Cisco will be
the equipment maker's customers, according to Henry Dewing, principal analyst at technology research firm
"There will be some fear, uncertainty and doubt about
Nortel, and there will be other vendors, in each of their markets, that make hay with that," he says. "I think that you will see some of the folks across the tech sector talking about the difficulties that Nortel is having and saying that 'you can't count on their future'."
Cisco, of course, is facing challenges of its own, making Nortel's customers an increasingly attractive target. The tech bellwether recently sent shockwaves through the industry when it forecast a
amid tight enterprise and service provider budgets.
The networking arena, like many other parts of the IT market, looks set to become more competitive in 2009 as firms fight for shrinking budgets. Forrester, for example, recently
that users' investment in communications equipment will decline during the coming months.
Purchases of routers, switches, private branch exchanges (PBXs), videoconferencing equipment, and unified communications equipment will fall to $353 billion, it said, a 3 percent decline from $364 billion in 2008.
Despite its much-publicized problems, however, Nortel's bankruptcy filing is unlikely to give the likes of Cisco any long-term advantage, according to Forrester's Hewing.
"I think that, at the end of the day, Nortel has a pretty loyal customer base, and I think they have good technology," he says.
What Nortel needs is time to sort out its sales, marketing and expense structure, according to the analyst.
"They have been using cash faster than they have been bringing it in, which has brought them to this juncture," explains Hewing. "Nortel needs some time to increase the length of the runway so that they can actually take off and get on a firm footing - I think that this protection is going to give them that."
Shares of Cisco continued Wednesday's
with the broader tech market, slipping another 2.4% to $15.36 from its closing price of $15.74. Motorola shares were inching up 1.7% to $4.18, and Alcatel-Lucent's shares were up 1% to $2.
Such is the scale of Nortel's business, however, that the firm's problems could potentially impact a slew of other tech companies. Electronics manufacturer
, for example, has a close relationship with the telecom equipment maker.
Flextronics, which provides electronics manufacturing services to the Canadian firm, said that it has been engaged in a Nortel risk mitigation for several months, in a statement released Wednesday.
This includes an agreement whereby Nortel has agreed to purchase $120 million of Flextronics' existing inventory by July 1st, 2009 and to make quarterly purchases of other inventory.
"Flextronics has been working to reduce its exposure to Nortel for some time now," said Mike McNamara, the Flextronics CEO, in a statement Wednesday. "We believe that Flextronics' strategy of customer and market diversification will continue to allow us to be in a position to weather the economic volatility."
Flextronics' stock, however, slipped 22 cents, or 7.33%, to $2.78 Wednesday following news of Nortel's Chapter 11. Thursday the price was down 2.1% to $2.75.
Citigroup Global Markets
estimates that Nortel accounts for around 4% of Flextronics' revenues, but does not foresee a massive long-term impact on the services specialist.
"Given the relatively small revenue exposure to Nortel, we do not anticipate today's announcement having a material impact on consensus estimates for Flextronics," wrote Citigroup analyst Jim Suva, in a note released Wednesday.
Other electronics manufacturing firms with a Nortel relationship include
( SMOD), which all derive less than 5% of their revenues from the equipment maker.
"We expect modest inventory and accounts receivable write downs across the supply chain related directly to Nortel," wrote Suva, explaining that Nortel intends to continue its operations. "In our view this means that Nortel's supply chain partners are likely to recover most, if not all, of their working capital exposures over time."
Suva also pointed to automotive manufacturing firm
as an example of how partners can withstand the challenges of bankruptcy protection. "Supply chain companies took accounts receivable and inventory write-downs up front and then later reversed the charges over time," he explained.