Nortel files for bankruptcy protection

Nortel Networks applied for court approval for creditor protection in the Canada, the U.S. and Europe on Wednesday morning, marking a new low for what was once one of Canada's most successful technology companies and a world leader in providing network infrastructure.

In a letter posted on the company's Web site, CEO Mike Zafirovski said Nortel is filing for creditor protection "in order to undertake a comprehensive business and financial restructuring. I firmly believe these are the right steps toward a solution for our company. This process will enable Nortel to become the highly focused and financially sound communications leader it should be.

"Most importantly, Nortel is still very much in business and our commitment to customers remains unwavering. We will continue to invest in leading edge R&D to deliver the value our customers expect from us. To all our stakeholders - including customers, suppliers and employees - please know that this decision was not taken lightly. I can assure you we explored every possible alternative, sought a variety of solutions, and engaged in extensive consultation with our Board of Directors and many other experts."

The decision has obviously shaken the company because Zafirovski's name at the bottom of the message was spelled wrong. It was soon corrected.

Nortel has lost more than US$7 billion since 2005, when Zafirovski took over after a series of managment changes and accounting scandals. The company has since lost 97 per cent of its market value in the past year to rivals such as Cisco Systems. Nortel has also endured a gruelling series of layoffs.

Atlhough the company emphasizes it has $2.4 billion in cash, it is going through it quickly. It had faced a US$107 million interest payment tomorrow, which was the event that trigged the bankruptcy protection filing. The protection motions freezes that obligation for 30 days.

Mark Fabbi, a Gartner distinguished analyst who specializes in enterprise network infrastructure and advises telecom buyers, said the move is both good news and bad news. "Better to do it now than later," he said in an interview this morning. "The biggest issue with Nortel isn't technology, its the financial postion they find themselves in, and that obviously represents too much risk for some organizations" looking to buy its gear.

In the last few months, with more news stories emerging about Nortel's shaky position after the company announced another restructuring in November, customers have been nervous. "If they're an existing customer, they're willing to buy more," Fabbi said. "If not, the general view is there's too much risk."

Roberta Fox, senior partner at Fox Group, a Mount Albert, Ont.-based enterprise telecom consultancy, also said the move has two sides. “The positive hope is this gives them a chance to get things sorted out," she said. "The concern is what happens if it doesn’t get sorted out? What happens to the (product) support and the capabilities for the people who have Nortel equipment? Phone systems still have to work.

"Hopefully they get things sorted out quickly and it has minimal impact on the customer base. Some companies come out of bankruptcy protection very well. Air Canada came out leaner, meaner on the other side.” Nortel has “very powerful assets,” she said, including its patents, products and large customer base.