Shortly before Christmas, I dismissed
rumours published at the time that Nortel Networks Corp. was
seeking creditor protection. As one reader put it, “that’s gotta be the
dumbest blog post (he has) read all year.”
The Brampton,
Ont.-based company Wednesday announced it is seeking
protection from creditors in several jurisdictions. In
Canada, the company plans to file for protection under the Companies'
Creditors Arrangement Act and in the U.S. under Chapter 11.
In a press release today, the firm said its “normal day-to-day operations are expected to continue without interruption.”
Nortel
lost $3.4 billion during the third quarter of this year and announced
plans to lay off 1,300 workers to save $290 million in salaries. It
also announced it plans to sell its metro Ethernet division.
During
the first nine months of 2008 it had $237 million in interest charges,
and used $675 million in cash to pay down debt. Its long-term debt is
$4.4 billion
Eleven years ago, Nortel bought Bay Networks for
$9 billion, and lost money most years after that. 2001 was a brutal
year, when it lost $27 billion, $16 billion of which was restructuring
charges. Its CEO at the time, Frank Dunn, is now facing fraud charges
for allegedly mis-stating financial results.
If I was smart, I
would leave the speculation on Nortel’s future to the experts.
Therefore, I will continue to speculate. An acquisition is highly
unlikely, and bankruptcy will not kill Nortel. Companies like Allstream
emerged from bankruptcy protection and continue operating. At one
point, it seemed half the airlines in the U.S. were operating under
bankruptcy protection.
What probably will happen is banks and
other companies to whom Nortel owes money will be issued shares to
replace their bonds. Those who hold shares right now will not get much
for their investment. This is why an acquisition is highly unlikely,
though the debt holders will certainly get more say in how Nortel is
run.