Nortel Talking to Siemens?

Check this out from the WSJ...A blurb about Nortel

February 19, 2008, 1:32 pm
From Texas Instruments to Motorola: When Cash Isn’t Really Cash
Posted by Heidi Moore

Deal Journal saw “Macbeth” this weekend and, somehow, when the three witches chanted “what’s fair is foul and what’s foul is fair,” it was easy to see parallels to the upside-down world of the credit crunch, where nothing is what it seems anymore.

Thus, we weren’t entirely surprised when we saw the latest tocsin that something wicked may this way come: in this case, a Merrill Lynch report on how technology companies that look secure because of the cash on their balance sheets may actually be depending on some debt securities that they may have to write down later.

According to the investment bank’s technology team, the companies with the most exposure include Foundry Networks, Texas Instruments and Photon Dynamics, who respectively have have 68%, 62%, and 54% of the “cash” portion of their balance sheets tied up in now-risky debt such as auction-rate securities and asset backed- and mortgage-rate securities. Those debt instruments looked like “cash equivalents” as recently as last year. Now: not so much.

Other big names may be at danger because tomorrow (and tomorrow, and tomorrow) they still will be drawing a big chunk of their income from the interest on those securities. Alcatel-Lucent, IDT, Nortel and Motorola all draw more than half of their pretax income from the interest-payments on that debt.

With respect to cost two chinese engineers are the same as one in North America?

This is just an account trick on which Nortel has many experiences...

OMG. The number of "personal copies" of simulation code I saw walking out the front door at Nortel? Incredible. Out of political correctness I won't state a specific ethnic group, but it's not like everyone knows. Same thing another company I knew. It's cultural. Corporate and ethnic.

This is a level of theft that would earn prison terms in any other business context. Telecom is a looking glass world.

many - im sure nortel and others in the network equipment space would love to have Cisco's "problem". I think Cisco has the resources to fend off their so called competitors for some time yet. As I said, they are in the dominant position similar to how Microsoft, Intel or Google are in their respective spaces.

many - you can call it standard XYZ by whatever standards body it is. The point is, its becoming a commodity and things that were once complex are now simple. The internet is beyond the revolutionary stage and only evolutionary now. Cisco is in the same position as Microsoft or Intel or Google. I doubt they will blow it.

Casual Observer.

I do not follow your logic. You named the IETF. IMO the IETF has been intentionally absent in real world solutions. I'll leave it at that. You say what was once complex is now simple, and I argue that the essential complexities remain. Things are sometimes made more complex by everyone "doing their own thing", Thinks are made more complex by convergence. No one can remove the essential complexities of the problem.

Cisco, microsoft and google are in different businesses. Cisco in the enterprise core network hardware, ,microsoft in the enterprise software and google in the search, portal and consumer software services. All are looking to get into each others software business.

Cisco's problem is they have a huge legacy hardware business to protect from people other than microsoft and google(because it's their cash cow). Believe me, this is a big problem because they have to figure out how to avoid feeding the milk to the cow.

I'm a fan of Mike Z and of some (but not all) of his lieutenants. Say what you will but he's more of a do-er than the emptty suits that preceeded him. Q4 numbers are going to be interesting and I won't be suprised to see them precipitate some announcements. I'm getting to the point now where I think the Enterprise and Carrier businesses need to start going it alone. The Enterprise business is pretty healthy and the MS deal provides a good outlook. I cannot say the same about Carrier. Sure there are many good products there (espec in MEN) and a reasonable cash generator in the shape of CDMA plus much good stuff coming out of the labs...but is it enough to see the business though this downturn which will hit the US worse than most?

Who wants an old product line and too many German employees? Answer: no one in their right mind.

PREDICTION: Nortel shrinking market cap + a european network gearmaker with euros that will strengthen further against the dollar = Nortel takeover 6 to 12 months out

Casual Observer - I do not think all is doom and gloom. I think that areas of the economy will suffer, and yes we may be in a recession. However on the bright side; I think that the market will move to "the next big thing" to recover losses. I think that what we are witnessing (he tech boom/bust) is a transfer of wealth. Nothing more.

I do not think this downturn will bw permitted to persist (except in certain US housing markets) past Q4 2008

Many - I agree. However, general economy conditions aside, Nortel stock price is going to continue to erode in the absence of a credible growth strategy. I'm sure more than one acquirer has their eye on Nortel but why make a move while MZ and his 'choker' cabinet continue to drive the stock on a steadily declining path? It makes more sense to wait. I have a couple of hundred bucks in my wallet, maybe I'll end up buying Nortel.

I'm not a doomer and gloomer. I think some companies will do well during this slowdown and others will simply die. Slowdowns have a way of, shall we say, separating the boys from the men.

I believe we're headed for a 2 year period no earnings growth for many companies and repeating the pattern of 1989-1992 in the S&P 500, Nasdaq and NYSE based purely on the fact that 70% of the US economy is due to discretionary consumer spending.

I believe companies on the edge of profitability like Nortel will be forced to make more cuts in order to reduce operating cost and attempt to show a profit.

Anyone see the story on Cisco's new CFO pondering substantial cuts ? This was on Om Malik's blog.

This may be heresy, but I think cisco's "big dog" days are numbered. I think they have a proprietary hardware line that they cannot keep up with, really crappy software and at the same time their core business is being commoditized (a perfect storm, if you will). I have had very bad dealings with them recently and they show a complete misread of their customers in some very important areas.

What cisco does have going for them is 1) an outstanding sales force that knows their business and the tools that support it, 2) an organization that is focused and not competing internally and 3) a reasonably visionary leadership ala chambers (but I still cannot believe they hired warrior) 4) deep pockets (although I think nortel has shown us that too much money can be a liability as well as an asset).

So no, I am not surprised to see cisco in the same place that nortel was in the early 1990s.

Will cisco be able to fix their problems? Maybe, maybe not,. But they are not the invincible, inevitable force that the market would have you believe they are.

Nortel has already been through a lot of their problems, the question is can they regain enough confidence (they cannot in my estimation under zafirovski and his comrades so called "leadership") and if they can regain their confidence, can they translate that confidence to their customers? It remains to be seen, but they are not

Many - good post. I think Cisco is on the edge too. I think Chambers is doing all he can to hold things together but he's in a precarious position now. Mario, Charlie, and Volpi are all gone. What's left? A huge collection of direct reports that are where they are because of execution, not vision. Sound familiar? Chambers needs to bring in some new blood at the top level to coordinate the limbs of the company. He's a smart guy so I bet he's already working on it. I think he will fare much better than Mike Z has so far.

Cisco will eventually have to cut prices and they are already moving R&D overseas. The biggest question facing the industry will be since all internet standards are open (mostly because of IETF) how long will it take for companies like Huawei and ZTE to develop similar products and get into a price war with Cisco and others. Given the lack of availability in the credit markets, I think Cisco may fare better initially with "vendor financing" options via their cash to keep their competitors at bay. The basic fact is none of these technologies are the rocket science they once were and time to market it quickly become the biggest issue which can be solved by throwing engineers in India and China the problem. They are after all more easily available there for less $$.

My take is Cisco will be proactive and try to maintain their lead. They may make mistakes along the way but they can acquire and invest their way out these mistakes as they have done all these years. They will also be able to survive any downturn because of they don't wait for problems to manifest themselves.

I agree that Nortel has "been thru a lot of their problems" but they have shown no growth the last 7 years so this cannot be excused. I still don't see any new products in the carrier, metro or wireless backhaul space from Nortel. Mike Z must have peeled the Nortel onion enough now that it stinks !

Casual..you really like to bash nortel.
You must have been canned there?
I guess we would all do the same thing if that was the case individually
speaking?
Regarding the chinese..they steal patents, copyright infringe and basically
are good at making imitiations that don't work.
Not to mention the continual arrests of chinese nationals spying and trying
to steal secrets from NASA and Boeing as mentioned last week.
If big tech companies put their faith in the Chinese they will ultimately betray
themselves. Cisco is big because it is american and lives on the router legacy.
Engineers in China and India are second or third rate when it comes to getting results due to the fact they are "working" in India or China.

Realist, your description of the chinese company is not... realist and representative... and typical of an American !
The fact is that for 1 western Engineer you can have 5 in China, but it's much more easy to blame the damned copier...
Huawei is still not at the same level of quality than our manufacturer, but look where they were only 20 years ago !

Your numbers are wrong Laos.
With respect to cost two chinese engineers are the same as one in North America
and that gap is closing steadily. I think today it is even less than 2:1.
And what do you get from those two engineers working in China?
Here is what you get..
The reality that they will bolt the minute they get more money, usually going
to WahWay where they can hand over technology they stole from the place
they just left.
As I said today it really isn't saving big tech companies to do business in China
with all the negatives assoiciated with doing business over there.
The big execs will learn...sooner than later...pity is they are too dumb and greedy
to have any foresight or they wouldn't have made the mistakes they have made
and continue to make.

Realist, I believe the ratio 1:5 is good and even pessimist as soon as you don't stay near the coast (ie city such as Shenzhen, Shanghai, etc). If Nokia, Siemens and other have now their manufacturing premise far from the coast, it's not an accident...

... but true that NN use to select the 1:2 area :)

Lao Tseu,

Let me recommend a book to you; "The Mythical Man Month" by Fred Brooks. In short it is shown that at a certain point more people reduce effectiveness and delay projects. It also hints that there is an essential complexity that can only be overcome by break throughs in understanding, not by sheer force or numbers.

I would also point out that each incremental order of magnitude improvement is more difficult than the last. Yes, 20 years has made a difference in Huawei's quality, however they will find each subsequent increment harder and longer to achieve. This does not mean that they wil not achive it, only that other comanies have had the same experience.

Anyway, I hope this post doesn't cause anyone to blame the copier...... :)

realist - im just a realist. its not just nortel - siemens, alcatel/lucent and others have competitive issues. these companies have one thing in common - a culture of entitlement based on the telecom industry having little to no competition until the 1990s. Once the bubble bursted these companies were exposed for their weaknesses while companies like Cisco and Juniper recovered much more quickly because of the lack of entitlement in their corporate cultures.

Bottom line, those that have the most cash, growing businesses and little debt during this credit crisis will come out fine. The others may struggle for some time yet. Good luck to all.

Casual Observer,

Ha! IETF! Ha Ha!

The IETF completely fails to deal with any of the most basic market and regulatory requirements or any interworkings issues, in favor of an academic ivory tower. I am sure competitors hope Huawei and ZTE build their product strictly following the IETF "standards". they will be crushed in the market.

My take on ciscos deeper pockets is that you are correct and this will allow them to ride out the current storm, however they need to catch this market transition (chambers words). In my dealings with cisco they are not off to a very good start although of course, I think counting them out would be a mistake. I see the shift that commoditize the core and moves the computing power from the purpose built machine into every appliance and device as well as the beginnings of networking these devices in a way that is easy for the user (iPhone) is gaining momentum. What I am wondering is this market transition as significant as the one that took chambers former company, wang labs down?

Although I think nortel has correctly identified the transition, I think it is doubtful they can really capitalize on it while being run by a management team from GE manufacturing. You are right the PBT and PBB products do not seem to be gaining traction in the transport/backhaul arena. IMO in order to make the "switched Ethernet" movement grow, nortel needs to partner with someone in the RAN that has equipment that can support a switched Ethernet interface. Is that motorola? I doubt that too.

Indeed. I think nortel position is weak anfd the general exconomic malaze will not help. I just do not think that the sky is falling.

To use a different metaphor, Nortel has already hit its proverbial iceberg. Yes, just like the Titanic, it will take some time to sink, but it is definitely sinking IMHO. It will take drastic action to stop the ship from flooding, or maybe a rescue ship will arrive in time (acquisition).

John Roese and his team are the musicians on the deck as the ship goes down - making nice noises and trying to create an atmosphere of normalcy, but not really having any effect on what's happening. They're soothing the fears of some of the first class passengers (analysts).

The executives are still eating dinner while the management team throws crew members off the ship to try to slow the sinking. The conversation at the dinner table is around the impact of air travel on Nortel's transportation business. The executive team feel proud of themselves because they have decided that they will have wings installed on the ship and begin flying between destinations. Life will be good.

The crew who do the work are locked below decks shoveling coal into the engines, up to their knees in water, desperately looking for signs of hope or rescue.

Someone informs MZ that the ship is taking on water so he assigns the chef, a longtime friend, to take care of it.

Obviously a fan of "Our Iceberg is Melting" Since the "Hackmen" keep throwing the "Fred's" off the boat before they can tell the paying customers the truth......the iceberg will indeed break apart and be sold for penny stock ........afterall...... most of the quarterly sellers have already cashed in.

NW, Have you read "who moved my soap"? I particularly like the chapter "bringing six-sigma to sing sing" :)

This economy's dying on the vine and anyone would be stupid to spend cash on any deal. Spending is coming to a grinding halt as I write this. Cash is king.

all speculation and out of question. NT is $5 billion market cap, likely $7 to 8 billion purchase price. 4 billion in debt with gazillion product lines losing share. Add to that liability of 36000 employees. telecom spending is reducing. us recession on the horizon. cut throat asia market.

nah no way if I were CEO looking to buy. If I really had to then I would wait a year and get it all for half the price.