The Nortel breakup: Frequently asked questions

Next month, bankruptcy courts are scheduled to supervise an auction of Nortel Networks Corp.’s enterprise business. At the same time, the federal Liberal party is urging the ruling Conservatives to carefully review Nortel’s agreement to sell its carrier wireless unit to LM Ericsson of Stockholm.To date, the only company that bid on Nortel’s enterprise unit was Avaya Inc. of Basking Ridge, N.J., which agreed to pay US$475 million.

Toronto-based Nortel, which has lost US$7 billion over the past three years, has been in bankruptcy protection since Jan. 14. Its board of directors has shrunk to three from nine, and CEO Mike Zafirovski left the company last month.

The future of Nortel’s products and business is still uncertain. Whether you’re a Nortel user or a proud Canadian who wonders what will happen to what was once Canada’s telecommunications research powerhouse, you probably have several questions. We’ve done the best we can to provide answers, based on interviews and testimony before the House of Commons Standing Committee on Industry Science and Technology, which held an emergency hearing last month.

For more information check out the Nortel interactive timeline

What will become of the enterprise unit?

This is a matter of speculation.

Avaya’s agreement to buy the unit, which makes switches, routers, IP phones, unified communications and security products, is called a stalking horse bid. Under rules set by bankruptcy courts, other companies can place competing offers for the same assets.

Ronald Gruia, principal analyst for emerging telecom with Frost & Sullivan, has said that put together, both firms would have more than 20 IP phones. It is not likely Avaya would keep all of them after a merger. But he added it makes sense for Avaya to keep Nortel’s contact centre products, because customers have invested a lot of money in training on them.

One Nortel customer is generic drug maker Cobalt Pharmaceuticals Inc. of Mississauaga, Ont. which uses Modular Integrated Communications System (MICS). The company is “seriously considering” switching to Ottawa-based Mitel Networks Corp., said Stephen Lem, Cobalt’s director of IT.

Lem said he is concerned Avaya may not support all current Nortel products if it gets Nortel’s enterprise unit. Avaya would not say how it plans to integrate the products, only pointing out that the auction has not taken place yet.

But in the short term, Avaya’s offer is good for enterprise buyers, said Brownlee Thomas, a Montreal-based principal analyst at Forrester Research Inc.

“For Nortel, it says ‘We’ve got hope,’” Thomas said at the time the deal was announced in July. “Of course we don’t always know how long these products will be supported.”

What else is Nortel selling?

Nortel announced nearly a year ago it wants to sell its metro Ethernet unit. To date, no buyers had publicly announced offers.

Nortel has offered to sell for US$1.13 billion the carrier wireless assets to LM Ericsson, which already has a lab in Montreal.

Ericsson will get Nortel’s CDMA products and continue to sell them to wireless carriers. Gruia speculates Ericsson will be able to

sell equipment another two years and service the networks for at least another four years after that.

Ericsson will also get a non-exclusive licence to use Nortel’s Long Term Evolution (LTE) patents, along with about 400 Nortel

employees working on LTE. Ericsson was the winning bidder in an auction that started in June with a $650 million stalking horse bid

from Nokia Siemens Networks.

Will the government review the sale?

Possibly. Recent published reports quoted Prime Minister Stephen Harper saying the deal “will be examined under the Investment Canada Act.” Network World Canada called the Prime Minister’s office to confirm this was accurate. A spokesperson did not answer the question and asked us to e-mail the questions but has not responded.

The Investment Canada Act requires Industry Canada to review all acquisitions by foreign firms exceeding $312 million. Although Ericsson would pay US$1.13 billion, Nortel’s chief strategy officer, George Riedel, told the House of Commons Industry, Science and Technology committee the “book value” of the assets Ercisson wants to buy is only $149 million.

Committee member Brian Masse, New Democratic Party MP for Windsor West, disputed Riedel’s claim, arguing the law states the $312 million cutoff refers to “enterprise value.”

However, Marie-Josee Thivierge, Industry Canada’s assistant deputy minister for small business and marketplace services, later testified the $312 million figure is in fact the book value. She said the value would have to be recorded on the most recent year’s financial statements, comply with Generally Accepted Accounting Principles (GAAP) and have been audited.

Why would Ericsson pay $1 billion if the assets are only worth $149 million?

Two reasons. The first is, Ericsson had to outbid Nokia Siemens Networks’ US$650 million offer.

The book value, Riedel said, refers to current assets and fixed assets. It does not include “intangibles,” which could include patents, trademarks and a future value of current customer contracts. When questioning Industry Canada officials, Masse said companies that are being acquired by foreigners “can have any book value they want.”

Masse appears to be correct. In a separate interview, the Canadian Institute of Chartered Accountant’s vice-president of standards, Ron Salole, said book value may include intangibles, but does not have to.

“All it means is the value of assets you’ve got in your books,” Salole said. “It depends on the company’s accounting policies.”

What are the political issues around the sales?

The sale of the carrier wireless unit did not get the attention of opposition politicians until July 20, when Research in Motion

Inc. asked for a review, claiming there are possible national security issues.

Neither the Liberals nor the NDP have made any noise about Avaya’s offer to buy the enterprise unit.

Mike Lazaridis, RIM’s co-chief executive officer, testified that RIM tried to buy Nortel’s LTE patents earlier this year. RIM officials then found out about Nokia Siemens Networks stalking horse bid, which carried essentially the same terms as Ericsson’s acquisition and include a licencing agreement for LTE.

The fact that it now included a licensing agreement “was a very unpleasant surprise” for RIM, Lazaridis testified. The licensing agreement “renders Nortel’s LTE assets of limited value to RIM,” Lazaridis added.

Mike Lake, Conservative Member of Parliament for Edmonton-Mill Woods-Beaumont, asked Lazaridis whether he was considering legal action against Nortel.

“We did consider it,” Lazaridis replied, adding: “We haven’t finished evaluating all our options to date.”

Ontario finance minister Dwight Duncan claims the “economy will be harmed” if the sale to Ericsson is approved and questions Ericsson’s commitment to keeping Nortel jobs in Canada.

The crux of Research in Motion’s argument is that by losing LTE patents Canada’s national security could be at risk because LTE could be used in networks used by the emergency services, including the Canadian Forces, during emergencies. The Department of National Defence refused to comment on this.

But Mark Tauschek, lead analyst for Info-Tech Research group, questions RIM’s claim. It does not matter who operates an LTE network, Tauschek said. The quality and reliability of public wireless networks in Canada are not going to be changed if a different manufacturer owns the underlying patents.

During his testimony, Lazaridis called on Industry Canada to initiate a four-way discussion between the government, Nortel, Ericsson and RIM.

Marc Garneau, a Liberal MP, retired naval engineering officer and former astronaut, supported this request.

“Before allowing Nortel’s assets to leave the country, we need this review to ensure the proposed sale is of ‘net benefit’ to Canada,” Garneau wrote in a letter to the government. Garneau apparently missed the testimony stating the LTE assets will remain with Nortel and be licensed, on a non-exclusive basis, to Ericsson. Ericsson is getting the CDMA assets, which will stay in Canada at its current facility in Ottawa.

How many jobs would Research in Motion have kept?

Lazaridis dodged this question during testimony before the House of Commons Standing Committee on Industry, Science and Technology.

Bloc Quebecois MP Robert Bouchard, unlike the Liberal and NDP members, was not taken in by RIM’s spin doctoring. Bouchard asked Lazaridis twice to provide details on the employees.

“We would have continued to grow the investment that Nortel has pioneered,” Lazaridis said, without providing numbers. “There are excellent employees.”

Lazaridis said RIM was committed to continuing to operate Nortel’s CDMA business, but did not have “an opportunity to really understand the transaction or the details” because RIM would have had to sign a non-disclosure agreement.

By contrast, Ericsson officials promised the company, which already has 1,900 employees in Canada, would employ 800 more as a result of the acquisition. About 400 of those would work on Long Term Evolution, Ericsson Canada president Mark Henderson testified before the committee.

“It will operate largely as a separate business” in Ericsson and be “headed by its current management,” he said, adding Ericsson would keep Richard Lowe, Nortel’s president of carrier networks.

During his testimony, Lowe said Ericsson is “committed” to keeping 2,500 Nortel jobs as part of the transaction, meaning about 1,700 American Nortel employees would keep their jobs.

Nortel would keep the LTE patents, contrary to claims by RIM and Garneau that Nortel’s assets would “leave the country.”

Will Nortel continue to exist after all of this? If so, where will the income go?

These questions were posed by Anthony Rota, Liberal MP for Nipissing-Timiskaming, Riedel said Nortel wants to sell its “principal businesses” but will keep its LTE patents if the Ericsson deal is closed.

As of Aug. 7, “no process has been put forward to deal with” the LTE patents but Nortel plans to submit a plan to the bankruptcy courts for approval, Riedel testified.

Either way, the Nortel we knew — which employed 100,000 people in 2000 and had US$28 billion in revenues — will be gone forever.

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Jim Love, Chief Content Officer, IT World Canada

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