From Giant to Dwarf: Nortel Prepares For Divestures, Liquidations
It’s been a rough week for bankrupt infrastructure giant Nortel Networks.
The company got slapped with a class-action lawsuit alleging it inadequately disclosed its financial status, prepared to sell its French research and development unit, got an earful from employees demanding their pensions and severance pay and decided to sell its majority stake in its Korean joint venture with LG Electronics.
It’s hard to tell what piece of bad news is the most significant, but the news of the divestures in Korea and France add credence to industry-wide speculation that Nortel may not emerge from bankruptcy in one piece as it had originally planned.
The sale of LG-Nortel marks the divesture of a profitable, standalone business with a strong balance sheet. Since its establishment in 2005, the joint venture has enjoyed several significant customer wins in Korea and in foreign markets. In 2008, Nortel said the business achieved a management operating margin of $341 million, or 27 percent, in 2008, and management operating margin for the first quarter of 2009 of 26 percent.
The French division will be liquidated over the objections of both its employees and management and is valued between euro 75 million and euro 100 million.
Aside from the objections over the planned liquidation of its French division, which will result in 700 layoffs, Nortel also has faced vocal criticism from former employees denied severance pay and pension funds. Though the shareholder lawsuit over Nortel’s financial disclosures does not pertain to the layoffs, it is indicative of the shared frustration of both employees and investors.
Nortel stated it was attempting to “maximize the chances of preserving all or a portion of the enterprise” in a March regulatory filing and has since given little detail about its plans for emerging from bankruptcy.
However, Nortel President and CEO Mike Zafirovski did not dismiss the possibility of breaking up the company. “…Work is well under way to evaluate the ultimate path forward for our businesses. Discussions are taking place with various external parties, however, decisions have not been taken and we continue to evaluate our restructuring alternatives,” Zafirovski said in a first-quarter earnings statement.
There have been widespread reports that Nortel is attempting to sell its largest segments, using its strong cash position to give it some bargaining power. In late March, the company divested large parts of its application delivery portfolio to Radware for $18 million.
Also, reports have emerged that a host of companies, including Nokia Siemens Networks, bid on large segments of the company, including Nortel’s profitable carrier networks unit and a research and development unit working on LTE.
Combined with the company’s divesture announcements, the news from the telecom rumor mill makes the possibility of Nortel emerging from bankruptcy in one piece more and more unlikely.