Analysts: Nortel hostile takeover unlikely

From the moment Nortel Networks Corp. announced earlier in the week that it had issued pink slips to its top execs and that its financials over the last three years were likely misrepresented, the IT world has been holding its breath waiting for the other shoe to drop.

One of the possible fates for the Brampton, Ont.-based company that arose within Canada’s financial community on Friday was an acquisition in the form of a hostile takeover bid, potentially coming from Nokia Corp. or Alcatel SA.

However, though analysts believe that an acquisition is a possibility, they agree that it is the investment bankers that are pushing for a takeover bid at this point and that the telecommunications equipment provider can survive its current situation without being bailed out.

“The investment bankers are trying to make themselves some money — that is what is happening [here],” explained Brian Sharwood, an analyst at the Seaboard Group in Toronto. He said that although investors and some customers are going to be shaky regarding Nortel for a little while, the bottom line is Nortel’s products still work.

“They are working on some large and fairly interesting projects for Bell Canada right now, they have a huge Verizon deal and Verizon is not going to back out because of something like this. Verizon is going to say, ‘that’s fine, get in order, we just want to know what we are dealing with,'” Sharwood added.

If an acquisition deal was to occur, it would be the investment banks that would be pulling in tens of millions of dollars in fees, and that’s why they are pushing for it right now, noted Mark Quigley, an analyst at the Yankee Group in Ottawa.

Quigley agreed with Sharwood that Nortel may be stronger than it appears.

“The customer relationships they have are deep ones…[if] you pick a carrier in Canada or in the U.S. you are going to find Nortel somewhere from an equipment perspective, so those kinds of relationships will be valuable,” Quigley said. “As a going-forward entity Nortel is in great shape. It’s not like we are looking at the wheels coming off the car here and the company is on the verge of collapse. I think the picture that’s [out] there is an entirely different one.”

Even if a rival company was planning a hostile takeover bid for Nortel, the process won’t be an easy one, Quigley noted.

With a market cap of $16 billion and a debt of $4 billion, any acquisition that was going to be made wouldn’t be done cheaply, Quigley explained. There would be a lot of money that would have to be spent to get it done and “I’m not sure how deep those pockets out there are.”

“I don’t know how willing any of those guys would be to take on significant debt to make the acquisition [work] and I think that presents a certain challenge,” he added. “The challenge is you still have a company that has 60,000 employees so you are looking at a very large company, a global entity, and those kinds of acquisitions are very difficult to make-work properly,” he said.

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Jim Love, Chief Content Officer, IT World Canada

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