Analysts applaud Nortel delay

It would seem that if Brampton, Ont.’s Nortel Networks Ltd. ever had a lucky rabbit’s foot, it has decayed and grown rank. An announcement at the end of March to delay spinning off the company’s fibre-optic components unit in an initial public offering (IPO) had the unfortunate timing of coming only days after the company cut an additional 5,000 jobs.

In an official statement from the company, Nortel said it is continuing “to examine all the options to unleash the full value of its components business, even in these challenging times. An IPO is at the top of the list of alternatives we are exploring. However, we are going to take our time to ensure that we get the maximum value from the business for our shareholders, customers and employees.”

Nortel refused to grant Network World Canada an interview to discuss the matter further.

Despite recent criticism by the media and by analysts for scaling back revenue expectations and for the company’s floundering stock (which had a 52-week low of $19.90 on the Toronto Stock Exchange (TSE) at press time), analysts are applauding Nortel’s decision to postpone the IPO of the fibre-optic components unit.

“In the immediate term, I think they’d be foolish to try to pursue a spin-off in the current conditions. It’d be ludicrous, actually, in a bear market,” said Lawrence Surtees, a senior telecommunications analyst at International Data Corp. (IDC) Canada in Toronto. There is a general reluctance in the market right now to embrace new IPOs, he said. Even a company with the strength of Nortel would be making a mistake by issuing an IPO.

Surtees went one step further to suggest that spinning off the unit would be unwise even under good market conditions. Spinning off business units is a model that Nortel competitor Lucent Technologies Inc. has pursued, but in Lucent’s case, it was out of necessity, he said.

With the stock prices of all of the incumbent telecommunications companies plummeting and showing no sign of immediate recovery, what affect is this new announcement going to have on Nortel?

“I don’t think this affects Nortel much [except] for some gnashing of teeth by employees who would’ve benefited from it the most. Key employees in that division who would’ve become the CEO and the board of directors and the senior management team are probably chaffing a little bit,” said Iain Grant, managing director of Brockville, Ont.-based The Yankee Group in Canada. He added that sales are soft in the fibre-optic components sector, so it was a good decision for Nortel to make.

According to Surtees, the optical networking business is critical to Nortel’s future and is the most important segment of its business right now.