How WorldCom took Nortel down with it

The breakup of Nortel Networks Corp., which has lost US$7 billion since 2005 and is under court protection from creditors, is not a done deal. But as of Monday, there was no indication the courts would block the sale of its business units to other vendors.

“All of these (asset sales) are subject to court approval but the alternative to that is a company that is insolvent and restructuring itself with a plan to go forward, and right now it can’t because all it does is lose money and will ultimately go bankrupt,” said Mark Zigler, a lawyer with Toronto-based Koskie Minsky, which represents former employees of Nortel.

Zigler is one of dozens of lawyers involved in Toronto-based Nortel’s court-supervised restructuring process under the Companies Creditors Arrangement Act.

Check out IT World Canada’s Nortel news page

With interactive timeline

The stay period, during which no creditor may commence or continue any enforcement against Nortel, lasts until July 30. Last Friday Nortel announced it reached a “definitive agreement” with Nokia Siemens Networks to sell its units that make wireless technologies using the code division multiple access (CDMA) and Long Term Evolution (LTE) standards.

Nortel also said Friday it is in “advanced discussions” to sell its remaining business units. Nokia Siemens Networks would not say whether it’s also interested in other Nortel divisions, which include enterprise and metropolitan Ethernet.

The US$650 million deal to sell the wireless unit to Nokia Siemens Networks is subject to approval by both the Ontario Superior Court of Justice (commercial list) and its U.S. counterpart. The deal also depends on the results of a public auction, meaning another vendor could offer Nortel more than Nokia Siemens Networks did.

During a conference call Monday, Nokia Siemens Networks CEO Simon Beresford-Wylie said he expects both courts to hear a request to approve the sale next week.

Lawyers representing the Canadian Auto Workers (which represents some unionized employees) and the Pension Benefits Guarantee Fund did not immediately respond to a request for comment for this article. Lawyers representing the Informal Nortel Noteholder Group declined to comment.

Zigler said his clients, who have “major concerns” about their pensions, would probably make a submission to bankruptcy court but did not elaborate.

“They will say what they have to say in court,” he said.

As of March 31, 2009 Nortel listed US$1.6 billion in pension liabilities, plus US$4.4 billion in long-term debt under “liabilities subject to compromise.” When it filed for bankruptcy protection Jan. 14, it did not pay many employees severance to which they were entitled, on the grounds that former employees have the same standing as any other creditor.

Susan Lorden is a former Nortel employee who was laid off a total of three times, but is not owed any severance.

She said during her stints with the company, between 1997 and 2001, Nortel was always “generous with its severance.” But this year, a friend of hers ran into trouble, losing his home because he did not get the $100,000 severance he was promised when he was let go.

“Former employees may get part of their severance but that doesn’t help you if you’re losing your house or you had to pull your kids out of all the activities they were involved in because they can’t pay the fees anymore, or you can’t afford to send your kid on a school trip because you don’t have that $20 because you’re trying to make your mortgage payment,” Lorden said.

She blamed Nortel’s financial troubles partly on the collapse of WorldCom Inc.

WorldCom, a Jackson, Miss.-based telecom carrier, filed for bankruptcy protection in the U.S. in July, 2002, amid a US$11 billion fraud scandal that resulted in a 25-year prison sentence for its former CEO, Bernard Ebbers, who is originally from Canada.

“When Worldcom tanked, that really took a big chunk out of Nortel too,” Lorden said. “That was a big catastrophe for Nortel. There were millions of dollars in orders and they were supporting the search and development in optical contracts pretty much with WorldCom contracts in optical. That really knocked Nortel for a loop and they never really recovered.”

Ebbers was sentenced in 2005, the same year Mike Zafirovski was hired as Nortel’s chief executive officer. Zafirovski, a former Motorola executive, replaced Frank Dunn, a CEO dismissed by the board in April, 2004. Dunn was charged a year ago by the Royal Canadian Mounted Police with two counts of fraud affecting public market, two counts of falsification of books and documents and three counts of false prospectus. During testimony last week before the House of Commons Standing Committee on Finance, Zafirovski said when he took the helm of the company, “many said it was a mission impossible but I and many at Nortel believed that Nortel is a great global icon that could in fact be fixed.”

But the financial crisis that started last year made Nortel “hit a wall,” Zafirovski said.

During his testimony, he said the decision not to pay severance was due to the legal standing of former employees with other creditors.

“Severance payments have equal weighing with all other provisions for other creditors, we did not have a choice but to follow the legal jurisdiction and this was an extremely difficult decision,” he said at the time.

But the company did get approval to pay $45 million in retention incentives and other bonuses to existing employees.

During his testimony to the House of Commons committee, Zafirovksi took issue with the term “bonus.”

“We do have a retention plan in place for 980 employees, which we thought was absolutely imperative to stabilize the company,” Zafirovski testified last week. In answering a question from Darryl Kramp, Member of Parliament for Prince Edward-Hastings, Zafirovski said “the annual incentive plan is not a bonus per se. That’s part of your compensation for a job personally well done.” Zafirovksi did not get a bonus or incentive himself but the fact that others did has former employees like Lorden angry.

“When a company is in bankruptcy there is no reason to be paying anyone a bonus,” Lorden said. “As a stock holder and former employee, that really burns me. If they’d taken those millions of dollars and turned them back to the company they could have paid severances that were outstanding and they’d have far more goodwill in the community.”