Is Breaking Hard to Do

By Mark Evans | Published: September 18, 2008

Breaking Up
Neil Sedaka once crooned “Breaking Up is Hard to Do” but you have to wonder if that’s the scenario facing Nortel CEO Mike Zafirovski.

In the cold, harsh reality of yesterday’s announcement of even more restructuring and the contemplated sale of the Metro Ethernet Network business, Nortel’s future seems more uncertain has it has since the end of the telecom boom seven years ago.

In many respects, the potential MEN sale appears like Nortel is throwing in the towel. MEN is a fast-growing (10%/year), highly profitable business with revenue this year of about $1.5-billion that sells technology that helps make the Internet faster.

Why sell it other than the fact it’s an attractive business that, in theory, will fetch a bundle. Heck, if there was a private equity firm with some cash and chutzpah, MEN would probably thrive away from Nortel.

To me, this decision smacks of desperation. Selling the UMTS business to Alcatel-Lucent made sense because it was a money-loser in a ultra-competitive landscape in which Nortel had single-digit market share. But MEN is one of Nortel’s best assets at a time when it needs all the strong horses in the stable.

One thing puzzling noted in a comment is how Nortel unveiled its plans. It didn’t say MEN was sold or was on the block but, rather, it could be sold. Sold if Nortel gets blown away from an offer it can’t refuse? And un-sold if investors give the idea the thumb’s down? It seems like a strange move.

BusinessWeek wonders whether the MEN sale is a harbinger of a breakup. The story includes this quote from long-time Nortel watch Duncan Stewart:

“Nortel has entered a very difficult period that’s not likely to get better. “It’s going to be sold or dramatically restructured before Christmas.”

In any event, the next two months before the Q3 results are released will be fascinating as Nortel puts the final touches on its restructuring plan.

Will thousands of more employees will slashed? Will MEN attract a buyer? Will other business units be turfed? Can Nortel compete in the services market against players such as IBM? Will the Canadian government let Nortel be chopped up?

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  • exnt2
    why would anyone care? nortel burned its bridges when it started the rhetoric that it will change from Canadian to American when the dollar was 0.50c US and corporate taxes were high in the 90's.
  • copper_athlon
    Mark,
    What do you mean "Will the Canadian government let Nortel"? I had heard that few years ago. But last three years NT stock price dropped from $30+ to under $3 today and I haven't heard any words from Canadian government. I thought NT has been forgoten from Canadian government already. That is understandable. When NT was $200+ billion company, there were a lot of cheers and a lot of promises. Now NT is less than $2 billion company, they may not pick up the phone when you call.
  • broadbandbill
    “There is no substitute for experience” – Lou Holtz, former Head Football Coach, University of Notre Dame.

    The very FIRST thing Mr. Z was advised on was to have a friendly chat w/Gary Daichendt just to pick his brain and get his insights into what (didn’t) happen during Mr. Daichendt very short tenure at Nortel, which Mr. Z ignored.

    The second thing that happened was the McKinsey suits setting up shop in Toronto. The rest is only a painful reminder of what happens to those that are not willing to engage experience.

    “Those that do not learn from history are condemned to repeat it!” George Santayana.

    -- bb

  • ex-Nortel
    For the past 2 years, I have been stating that Nortel has the wrong business model and strategy, lacks the right management team, products, & funding to implement a breadth and depth strategy, and that any fundamental analysis of Nortel demonstrates that the company is trapped in a downward spiral from a revenue, profit, product, market share, and stock price perspective. Now I have been proven right and the company is finally looking at meaningfully downsizing to a core set of businesses and selling off assets and businesses.

    Unfortunately, this move comes to late. Nortel will attempt to sell assets and businesses in a down business environment with a very severely limited number of potential buyers.

    The fundamentals are going to get worse - this will begin to look like a study in the "Chaos Theory". Nortel's business will continue to deteriorate while attempting to sell anything of value in a market with few buyers (who hold all the cards). As the Lehman Bros situation shows, it is far better for a buyer to buy assets in a bankruptcy situation. And of course, another quarter of cash burn will make Nortel even more desperate. So Nortel will probably sell its best business in a manner in that will guarantee that Nortel will get a terrible price for the asset.

    Nortel really misses the 2 Garys now. Their business plan would have spared the Nortel shares holders all of this agony. But Bill Owens and the BOD just knew better. Press releases and money losing deals in India do not build a company or protect its employees. Why worry about funding money losing businesses when you are secretly negotiating an exit package?

    The stock remains a sell although any drastic dip will force shorts to cover and drive up the stock price in a nice short term move up. Then the selling should be again. This will continue to happen until NOrtel's break up or bankruptcy.
  • exnt
    Timur is right, Mike decided to concentrate on execution of current strategy: being a full line telecom supplier. However, this strategy was flawed and all the old Nortel execs (except Richard Lowe) were telling him this. The Garys also knew this - Nortel could not compete across the board. But Mike Z only listens to people who love Mike Z, which are all his new hires like Hackney, and they agreed with Mike, since they love Mike and Mike is always right. So the circle of yes-men leads us back to a failed strategy which has crippled Nortel.
  • Timur
    This shows that Zman's strategy for almost the past 3 years has been totally flawed. A bad strategy with great execution will give a crap result. Zman should have come in 3 years ago and sold off as much of the carrier business as possible to focus on enterprise. Now it is too late.
  • straighttalk espresso
    In hindsight selling MEN makes sense. Cashflow is negative so in this environment something drastic had to be done in order to stave off bankruptcy. The future vision for NT is as a Enterprise player and Mike Z and his closest lieutenants recognise that Enterprise represents the best hope for Nortel long-term. So that division is not going to be sold (unless the whole company goes..).
    Which leaves Wireless, Carrier Wireline and MEN.
    Strategically, selling Wireless makes most sense. Unfortunately its the only part of the company making real money and although it;s declining fast, CDMA is effectively subsidising the rest of the business.. So selling Wireless would render the rest of the company dead on it's feet.
    So that leaves Wireline and MEN. Wireline would be very messy to divest and besides ...who would possibly want to buy it? (and go head to head with the Huawei?). MEN represents a juicy technology and tidy business. While its not profitable for Nortel it could easily be very profitable for a player with the right operations scale. And selling it is the only option for Nortel to take in badly needed cash without killing the whole company. As others have noted, this isn't about strategy, it's about survival.
  • tino valenti
    MEN is NOT highly profitable...check the segment reporting in the 10Q's & K....
  • You're right but...MEN's "Management OM" increased to $17M in Q2 from $10M in Q2 2007, Meanwhile, MEN's gross profit increased from $139M to $143M in Q2, while gross margin remained flat.
  • Mixedfeelings
    As a former employee, It is truly sad to see what has happened to this once great company.

    I feel sympathy to all the hard working and honest employees that will be left holding the bag when the end comes.

    But as mean as it is, I will be happy to see some of the untrustworthy and ruthless management personnel that I had the misfortune of knowing finally get a taste of their medicine.
  • Smart decision
    Even with a few gems in the MEN product portfolio, this business lost 10m last year and will lose 8m this year... its not profitable!!! Margins are poor!!! The smartest thing they can do is to sell it!
  • bankrupt
    possible that the banks are already coming after Nortel. with the $10 billion in debt, creditors would want a piece especially a 'priced' aset before they sell it off, breakup the company, plunder it for bonuses and then leave a bankrupt shell.

    its possible the unit does not sell. a high possibility that no-one will buy the entire unit since its mixed with legacy and optical. if they do, the buyer will almost likely have to dump the legacy stuff. Nortel being Nortel would want to sell the whole thing, would want major bucks, probably a stake ... time will pass, sales will dip, the priced asset will be worth less.

    nobody is going to shell out $1.5 billion in sweet cash for the unit. Nortel needs cash so will not take equity. they will not take a reverse acquisition. markets have slowed. capital not easy to get. no debt available. junk bonds maxed out. no gov bailout either.

    its going down to $1 / share. its over.
  • protosphere
    What if no one buys it?

    Is this a possibility?!
  • more
    There _will_ be a buyer. The way Nortel can find a buyer is to adjust the price according to market conditions. I guarantee you that if Nortel put MEN up for sale for $1, it would find a buyer. Guaranteed. The bigger question will be if the selling price ultimately represents good value for the money.
  • Daphne
    "It wouldn't be a surprise to learn that the investment banks are going through their list of risky credit and forced Nortel's hand in this situation."

    If this isn't already happening, I expect that it will happen as soon as the creditors learn that Nortel is selling assets.
  • The Mole
    In for an interesting 4 days , expect a major announcement - everything is 4 Sale MEN is a smoke screen .
  • vested
    More mentionned 'something is fishy'... lets look back a while... you had posted an entry of rumours IBM or (MS) would buy Nortel... I thought 'nahh what would they want with the MEN/Carrier side of Nortel?' Now with that gone, enterprise players would easily scoop up Nortel. Think about it....
  • even
    Anyone have any updates from Barry Richards (Paradigm Analyst)?? Just seems like yesterday when he predicted Nortel at $ 23.00/share??
  • less
    Z is an American sp he doesn't undertstand (the) culture.

    Personally, my favorite breakup song is the ageless "Sad Eyes" by Robert John.
  • more
    Perhaps the tale that will never be told to the public is what triggered the whole event. Yesterday's announcement seemed to be more of a distress fire sale announcement more than a premeditated spinoff. Well planned sales of business divisions are not hastily arranged, and generally announced to the public with the words "HAS BEEN SOLD" rather "UP FOR SALE." Especially with the sudden change of course in strategy. Something's fishy.

    It wouldn't be a surprise to learn that the investment banks are going through their list of risky credit and forced Nortel's hand in this situation.
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