Nortel Networks Corporation is formerly known as Northern Telecom Limited, is a multinational telecommunication equipment manufacturer. With headquarter in Toronto, Canada; Nortel does business in more than 150 countries all over the world including Malaysia. Nortel is a recognized leader in delivering communication capabilities that enhance the human experience, ignite and power global commerce, and secure and protect the world's most critical information.
On January 14, 2009, there was big shocking news when Nortel filed for protection from creditors in the United States, Canada, and the United Kingdom. Nortel have to do that in order to restructure its debt and financial obligations. In June 2009, Nortel announced it would cease operations and sell off all of its business units.
After the internet bubble, many IT-related companies are suffering due to the fierce competition in the market. Nortel once a giant in telecommunication industry currently is under liquidation and we do not know how long that it can survive.
INTRODUCTION
PRODUCT HISTORY
INTERNET BUBBLE
The internet bubble or sometimes called "IT bubble" was a speculative bubble happening between 1995 and 2000, with a climax on March 10, 2000 (refer to Figure 1). During that time, stock markets in industrialized nations saw their equity value rise rapidly from growth in the more recent Internet sector and related IT fields.
Figure 1: The technology-heavy NASDAQ Composite index peaked at 5,048 in March 2000, reflecting the internet bubble
In order to be competitive in market, Nortel made big investment in high-speed fibre optic system in 1993 and lead the industry forward. In the late 1990s, Nortel grew at about 100% annually. The company sought to dominate the emerging market for public and private networks. This had to be done by trying to transform a century old telephone company into a modern IP technology based firm, but those skills were beyond what Nortel was used to do.
Nortel had to pay a huge price for acquiring Bay Networks in 1998 to acquire these skills. It also bought Alteon Websystems for US$7 billion. Given that this firm had revenue of US$200 million; the price must be regarded as huge. As the internet revolution created massive growth in fibre optic gear, Nortel grew rapidly and so did its stock. At its height, Nortel accounted for more than a third of the total valuation of all the companies listed on Toronto Stock Exchange. It has expanded rapidly and entered the new markets.
Thought the company paid a huge price for these acquisitions, it failed miserably in integrating them and transforming its business into IP routing. As a large and old firm, Nortel never really embraced the IP shift in the marketplace and then the market bubble burst in 2000 and 2001.
The recession was particularly hard on companies like Nortel, which had paid excessive prices for firms which were never really absorbed. Nortel had paid US$2.1 billion for Clarify Inc. in 1999, but this firm was sold in 2001 for only US$200 million. In the bubble years, Nortel had about 95,000 employees, but 60,000 of them being fired due to its financial crisis.
Figure 2: Nortel performance
LIQUIDATION
Nortel was the first giant in the technology industry that facing bankruptcy issue during this global downturn. On January 14, 2009, Nortel filed for protection from creditors, in the United States under Chapter 11 of the United States Bankruptcy Code, in Canada under the Companies' Creditors Arrangement Act, and in the United Kingdom under the Insolvency Act 1986. Nortel had an interest payment of $107 million due the next day, approximately 4.6% of its cash reserves of approximately $2.3 billion.
The share price for Nortel fell more than 79% on the Toronto Stock Exchange after the announcement. A government agency in Canada, EDC had agreed to provide up to C$30 million in short-term financing through an existing bonding facility, however the Canadian government resisted characterizing its position on Nortel as a bailout.
Nortel initially hoped to re-emerge from bankruptcy, so that it paid out retention bonuses to almost 1,000 of their top executives, totalling up to US$45 million, drawing criticism as the company withheld severance payments to employees laid-off prior to the creditor protection filing.
The worsening recession and drop in stock markets deterring potential companies from bidding for Nortel's assets, and many of Nortel's major customers reconsidering their relationships with the restructuring company. In June, 2009 Nortel announced that it no longer planned to emerge from bankruptcy protection, and would seek buyers for all of its business units. After announcing it planned to sell off all of its assets, Nortel shares were delisted from the Toronto Stock Exchange on June 26, 2009 at a price of US$0.185 per share, down from its high in 2000 when it comprised a third of the S&P/TSX composite index.
Nortel handed out US$14.2 million in cash compensation to seven executives in 2009. Nortel also paid out US$1.4 million to 10 former and current directors, and paid US$140 million to lawyers, pension, human resources and financial experts helping to oversee the company's bankruptcy proceedings.
In February 2010, Ernst & Young, the court-appointed monitor of Nortel's Canadian bankruptcy proceedings, reported that the assets of Nortel's Health and Welfare Trust had a shortfall of US$37 million in its net assets as of December 31, 2008. The trust supports pensioners' medical, dental and life insurance benefits, as well as income support for some groups such as long-term disability recipients.
CRITISM & CONTROVERSY
CONCLUSION
Nortel this week said it will sell its CDMA and LTE wireless business to Nokia Siemens Networks for $650 million. Nortel also said it is seeking buyers for the rest of the company's operations - enterprise, optical and Metro Ethernet among them.
Nortel is also delisting its shares from the Toronto Stock Exchange. In essence, the company, after 100-plus years as Canada's foremost telecommunications equipment manufacturer and at one time valued at over $200 billion, is exiting the arena.
