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Nortel opts for bankruptcy; can it survive?

Posted: 16 Jan 2009     Print Version  Bookmark and Share

Keywords:bankruptcy  reorganisation  telecommunications  manufacturing services 

As part of the agreement, Nortel said it will buy Rs.600.44 crore ($120 million) in inventory from Flextronics by July 1, and commit to purchasing "other inventory and to terms relating to payment and pricing." The deal sweetens what is apparently a problematic situation for Flextronics, which in recent years bought several Nortel plants in anticipation of receiving regular multi-billion manufacturing contracts from its Canadian customer.

"Flextronics has been doing anywhere between Rs.4,002.91 crore and Rs.7,505.46 crore ($800 million and $1.5 billion) worth of annual business for Nortel, and the loss of a significant portion of this business will undoubtedly have at least a temporary negative impact on sales and margins," Matthew Sheerin, an analyst with Thomas Weisel Partners, wrote in a report. "We would not be surprised to see Flextronics announce the shutdown of some of the plants, resulting in potential restructuring charges."

Supplier angst

Nortel's bankruptcy move will definitely leave many of its suppliers holding a questionable contracts they might not be able to enforce, a development component vendors already struggling with in a disadvantageous pricing environment might find unacceptable, but which they may not be able to fight.

In response, many vendors will be wary of any future dealings with Nortel. Reports indicate many Canadian companies that supply products to Nortel have over the last years tried to diversify their operations and customer base to reduce dependence on the company. This could be a problem for Nortel as it tries to resume normal operations. The company said its "normal day-to-day operations are expected to continue without interruption," adding that it "remains 100-per cent focused on serving customers worldwide through continued R&D investments and support of its product portfolio to fulfil customer needs."

Nortel executives can daydream about normal operations, but this is a highly unlikely scenario for the company owing to various factors. First, its regular activities, including the use of available cash and ability to engage in strategic alliances, will now be closely monitored by, and perhaps even require approval from, regulators in Europe, Canada and the U.S.

Also, while suppliers facing the prospects of weaker demand may be easily placated, telecommunication service providers who have the option of buying from stronger competitors would require different terms. To keep current customers, Nortel would have to prove that it can continue to support product lines, maintain necessary product upgrades and fund R&D as well as continue cost-effective manufacturing operations.

It's obvious Nortel won't be competing in all of its current product categories. Company executives said the bankruptcy "will allow Nortel to deal decisively with its cost and debt burden, to effectively restructure its operations and to narrow its strategic focus in an effective and timely manner."

If it is to survive, Nortel will have to shrink operations drastically and focus on key product segments where it holds a commanding lead in the market. As of the end of 2007, Nortel had four operating segments, including carrier networks, enterprise solutions, metro Ethernet networks and global services.

Sales in 2007 fell to Rs.54,539.67 crore from Rs.57,041.48 crore ($10.9 billion from $11.4 billion) in 2006. Now Nortel must decide what revenue level it can comfortably support in future years while putting in place the cost structure and the partnerships it needs to achieve profitability whenever it emerges from bankruptcy.

-Bolaji Ojo
EE Times

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