Nortel Ready for M&A

By Mark Evans | Published: April 2, 2007

UBS Securities analyst Nikos Theodosopoulos got together with Nortel CFO Peter Currie recently. Among his takeaways were the increasing likelihood that M&A will be part of Nortel’s future growth strategy. “With the debt refinancing of the upcoming $1.8-billion converts due in 2008 resolved, settlement of the class action lawsuit, and restatements largely behind, Nortel is more comfortable pursuing strategic M&A,” Theodosopoulos said. “The three areas for M&A focus are likely to be a) enterprise; b) metro ethernet/optical and c) services.”

The question is whether we’re talking about small deals such as Tasman Networks ($99-million), medium size deals such as PEC Solutions ($448-million) or something bigger. UBS reduced its stock target price to $26 from $27, while maintaining its “neutral 2″ rating.

Update: The Financial Post’s Trading Desk has an item of the UBS note.

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  • Observer

    “The question is whether we’re talking about small deals such as Tasman Networks ($99-million), medium size deals such as PEC Solutions ($448-million) or something bigger.”

    PEC:
    Didn’t they just get criticized for spending a premium on PEC’s inrcreasing revenues with declining eanings/profits since 2002 for $448M! Analysts hated this deal and rightfully so as they will be lucky to get 200M for PEC now ever so cleverly renamed tp Nortel Government Solutions screaming /begging for the business they named it self for.

    TASMAN:
    Now, they pay 99 million bucks to compete in a market some one owns 90% lionshare not marketshare!

    Who pays $99M for this expensive advertising to be seen doing something/anything in desperation?

    “Still, after nearly a decade in business, the company manages to make less than $10 million in sales per annum — Hoovers puts the amount at $7.8 million. At the advertised price, therefore, Nortel looks to be paying a whopping 12.8 times sales to acquire Tasman’s technology. ”

    Now imagine going something bigger when they blew 20 billion (that’s with a “b”) in acquisitions during the bubble days.

    These guys just don’t have a good track record in acquisitions, can you imagine something bigger?

    Like doing another BSNL, except larger.

    Heck, their ongoing lottery management pay practices while losing money and their CFO/auditors leaving, post fraud and settlement revisions downplaying inquiry, etc., make it look like they are doing something larger things in other areas too, LOL

    They better stick to cuts as business sure ain’t growin, never mind mergers and acquisitions, they never had luck with or materialized here either like Putian, Huawei, etc.

  • curious

    What is the reason for your obsession with putting down Nortel?

  • Apple

    Observer

    If I were Nortel’s CEO I would continue cutting and chopping to sell all the difficult to manage parts and focus on shaping a small and profitable company to be taken over or merged with a good name.
    Make Nortel small and profitable and merge with JNPR as equal partners and give up on Nortel name as it is subject of laughs and scandals!
    SEC charging Nortel’s managers with frauds is not going to help Nortel to get new customers. We should expect criminal charges also as cooking the books for bonuses is a crime in America. RCMP will have no choice but follow FBI, same as OSC did after SEC charged Nortel.

    OSC did not use the F word in their charges.
    http://www.osc.gov.on.ca/Enforcement/Proceedings/SOA/soa_20070312_dunnf.pdf
    SEC used the FRAUD word 37 times in their document
    http://www.sec.gov/litigation/complaints/2007/comp20036.pdf

    my opinion

  • Last Hurrah

    At some point folks have to stop looking at Nortel’s past. I believe Mike Z and the new management team are leaving no stone unturned in their efforts to remake Nortel. The worst that could happen is tearing apart the company and forcing a retreat into Canada. The fact that the report was written by the UBS analyst right after they met with Nortel management means that they are on the lookout for acquisitions. I wouldn’t be surprised to see more R&D cuts this year while Nortel management looks for companies with newer products and a stronger future. This is very similar to how leveraged buyouts work.

  • many

    I hear friends of mine at nortel repeat the mantra all the time, but when asked for specifics it just ain’t there.

    I think people will stop looking at nortel past as soon as nortel has successes to point at. Right now it’s all smoke. The bad deals so overwhelmingly outweigh the good even in the post Dunn era that I frankly don’t believe them.

  • Last Hurrah

    many – I think that’s because even most employees are kept in the dark. I think you can basically see that now Nortel is either the new senior management and everyone else. I would expect the new management to be more aligned with Wall/Bay Street at this point so I think the interview and writeup by the UBS analyst makes sense. Remember its management’s job to turn around the company. If they can find other smaller/quicker companies to buy and discontinue investment in internal R&D, then they should do it. Their only loyalty is to the shareholders and not the employees. Simply put, its management’s job to increase profits and reduce cost where necessary. I think this is a painful lesson the employees in Canada and the United States are about to learn again. The pressure on Zafirovski is immense at this point. We must remember he was trained by Jack Welch himself.

  • many

    Right, But if the employees don’t know the specifics, they will have a very hard time executing. If things work, they will work by accident rather than by design (…..as has been true since nortel took over BNR)

    I think Welsh was successful in no small part because he compartmentalized the company into self contained profit center silos. This will not work in a company who’s technology (and survival) depends on a layered rather than vertical (siloed) organizational model.

  • Qique

    I agree with Many…

  • Last Hurrah

    Many – why would existing employees need to know the specifics if they are going to be replaced by new acquisitions ? My guess is the only people “in the know” at Nortel are the new senior management. Everyone else is expendable if they don’t add to the bottom line. This includes older Nortel management at higher levels of the company.

  • many

    I see. So in that case the nortel brand is simply a holding company? Perhaps you are right, but I hope not.

  • Last Hurrah

    Exactly. I tend to think of Mike Zafirovski as being the head of a leveraged buyout (LBO) with the real people in the background at places like Citigroup. If you look at many of the moves he’s made (debt restructuring, operational layoffs), they’ve been trying to clean up the company’s books and increase its value thru traditional LBO techniques. The next step in this playing catch up to competitors which I think they will have to do via acquisitions. Zafirovski is cut in the GE mold so I believe he will do anything necessary to turn things around.

  • Observer

    Curious, no obession, fascination. Why do you ask with such presumtion? You wish facts were different? Me too.

    I wish we could say anything positive. CDMA is set to boom for them in 2008 but it is set to tank instead and accounts for 80 to 90% of their EBT, WiMax is selling like hotcakes everywhere like with Sprint (and you can expect ALA+LU to come out with their own WiMax) but Sprint a long time customer surprised them saying thanks but no thanks like Force10, or BT for that matter, or Microsoft server software sales for enterprise will make a billion in sales for them when Dvorak article paints different story, they are credible or have great numbers, management’s pay practices are finally reflective of performance, or why axe-cutter turns megalomanic jeopardizing profits for supporting tanking company, like they work in shareholder or employees interest in not too distant past, downplay revisions/inquiry as SEC auditors/CFO walk, SEC charges, etc. it is endless… anything. Sorry I have no rosey stories to tell you.

    We post the facts as we see them, like fact Nortel paid one of the largest frauds settlements ever. Remember Enron or Worldcom? Fraud is bad curious and deserves to be put down, by you, me, society, the moral majority. Nortel is lucky they still trade holding so many hostage in settlement, and they even revised post fraud, imagine if they folded, there would have been greater revisions. it is endless

    If you want to know my greatest peeve curious, it is as Owens said, many are still there, and SEC is investigating many still there too.

    Fraud is bad curious.

    Also, who else would expose the above 2 guys talking to each other with identical writing styles to bury realists posts here? Where do you think that guy is from curious?

    I do not trust Nortel curious, do you?

  • curious

    Ok, so why do you have a ‘fascination’ with putting down Nortel? Maybe it is time to get some therapy and move on.

  • The psychiatrist

    curious- this freak of nature has been at it for 4 years and counting.He Has what we term “obsessive compulsive disorder” to slander and flood the yahoo board with any negatives he can conjure up.

    This guy is a loser,lost all of his money on the count of the stock going down as a result of the restatement from way back in 2004 under Frank Dunn CEO at that time.Well here we are 3 years later and this guy can’t make the distiction between Nortel then and Nortel now.

    Very pathetic that this guy floods the yahoo board with his never ending slander,only to find out that most visitors to that mesage board have become indifferent as a result of his incessant posting.

  • curious

    Mental illness is a sad thing, I just hope he can get some help and move on. Nortel may continue to flounder and eventually go away, or they may come back and make everyone left fat and happy. But this guy’s constant disparaging and negative comments will not affect the outcome either way. Just sad and downright annoying.

  • Stock Investor

    Psychiatrist, if it weren’t for Observer’s comments some time ago when this stock was hovering on $8 (prior to the 10X1 split), I would have lost a bundle on this stock…thank you Observer for keeping a level playing field of pumpers and shorts on the yahoo board…so far I’ve made 10K shorting this stock when I originally had intended to buy/hold it…I’m sure there’s others that have benefitted from Observer’s insight on Nortel besides me.

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