Should Nortel Go Private?

"Of course, it’s highly unlikely Nortel would ever consider going private but at what point would it make sense. I mean if Nortel’s market cap fell to $500-million, why not use the proceeds of the metro Ethernet network business sale - assuming they can sell it - to take out shareholders?"

of course, this quote underscores your complete misunderstanding of the basics. This sounds like you think that Nortel belongs to the management?!?!
Newsflash: NT is a public company and it belongs to shareholders. THEY OWN IT. If NT sells a unit for $500M and chooses to distribute the proceeds to the shareholders as some kind of a special distribution/dividend or a share buyback, that doesn't change the fact that whatever the shareholder equity remains after this, it will still be owned by those same shareholders.

This is NOT how NT can go private.
How can it go private?
It can go private if someone offers some cash to existing shareholders and buys all outstanding shares.
This can not be NT itself using company money.
This can be someone who has cash or who can borrow cash.
Most companies going private do so via an LBO. LBO happens to companies who are cash cows. This happens when someone can borrow enough cash and pay it back using free cashflows that the cashcow company generates. This is similar to buying a rental property on mortgage and using rent collected to pay the mortgage and build equity.
NORTEL IS NOT A CASH COW AND NEVER WAS ONE. Unfortunately will probably never become one.
So no LBO possibility here.
So chances of going private are very low at this point.

Who the heck is Fred Wilson ? A lot of folks like Fred need to think differently. When the depression really hits, the capital markets will get emptied out by the big banks. This process has already started This is by far the ugliest market in a generation if not more. In a system controlled by speculators, it will all end in tears for most people. Governments will need to rethink a lot of basic assumptions about free-market capitalism the next few years. The capital markets themselves don't have anything but the next quarter in mind. Nortel would be wise to use their cash to buy themselves out as the stock continues to fall. They could then entice talent by giving ownership stakes to employees. Actually, there is a great opportunity for companies like Nortel to remake themselves given the failure of our current capital system.

Fred is a partner with Union Square Ventures in New York. His blog - avc.com - is one of the most popular business/tech blogs around. He's well worth reading.

At this point in time, the BOD remains committed to the executive management team. Private equity is tight and no one would want to get involved in a hostile take over of Nortel - this would drive up the price of a near bankrupt company and it would make the performance of due diligence impossible.

Any attempt to take Nortel private would require the approval of the BOD but would also require that the BOD and executive management team would have to resign and not participate in any private buy out and restructuring. Any participation by the BOD and any member of the executive management team in a private buy out would trigger a flood of share holder law suits, and possible OSC and SEC criminal investigations.

Congradulations Mark

This blog has become nothing more than a bash fest.

Your blog topics defintely encourage this.

The Psychiatrist,

In terms of comments, what would you suggest to encourage a conversation featuring insight, constructive criticism and fair comment?

On several occasions, I've attempted to encourage people to embrace a different approach but it is what it is. I suggest you learn to take the good - and there are some very insightful people out there - with with the bad.

As for my blog posts, I'm just saying it like it is. Nortel's in flux - strategically, competitively and technologically. With a declining stock, an asset sale on the near horizon and an uncertain shift into enterprise, software and services, there's a lot of negativiity surrounding this company. This blog just reflects this reality.

If you want offer up some suggestions, I'd welcome them. Consider the ball to be in your court.

cheers, Mark

No, it doesn't make sense for Nortel to go private because it's unnecessary.

Nortel has a lot of product and portfolio issues, but let's park those for a minute. The root of Nortel's malaise, in my opinion, is a leadership team that is a mismatch with Nortel's business. I've been thinking that it would be my preference to see them go (and be punished for what they have done), but maybe not. It might be worthwhile to keep them but change the structure of Nortel to suit their GE-modeled skills.

GE is an investment company, not a product company. A telecom equivalent of GE would be BCE. BCE invests in complementary businesses, drives (or at least enables) some synergy between the portfolio companies, and acquires or divests according to individual company performance and industry trends.

My idea is to restructure Nortel into more of a BCE model. Each of the major businesses is spun out to operate as an independent company, each with it's own executive leadership team and BoD, populated by individuals who are relevant in the industry. Nortel retains an interest in each company, the percentage of which would vary according to strategic importance. Each of the companies benefits from an influx of investor capital which would help to buoy up the portfolio investment and make them more competitive. The individual companies would also benefit from autonomy - no more knuckleheaded Carrier ideas being forced on Enterprise and vice-versa. However, when the individual companies were involved with strategic bids, etc., they could still call on the 'family' for support.

Nortel Corp would now be the core company and it would operate like a holding company. Investments in underperforming companies could be sold off and reinvested in emerging growth sectors without all the pain of layoffs, severance costs, etc.. It's a much more market-responsive model. This is the GE / BCE model.

Why would this work?

1. Because Mike Z and his cabinet can probably execute this kind of model. It plays to their strengths. MZ is NOT allowed to chose the leadership of the individual businesses, that is the job of each of their (hopefully) qualified boards.

2. It separates the financial results of each business.

3. It enables a survival-of-the-fittest model. It becomes MUCH easier to divest an ownership share in an underperforming business.

4. Lots of other reasons.

Why is this a good idea?

1. The current model is broken. Nortel doesn't know what businesses it's in and MZ and his cabinet are not capable of running them.

2. It's a good way to attract capital. Today some investors might like what's going on in MEN but don't want to invest in a company that has such obvious leadership issues in the Carrier and Enterprise businesses. Similarly, Microsoft might invest in the Enterprise business if it were separate from the mismanaged Carrier business. The bottom line is focus. Focused mandate, focused accountability, and focused investment.

3. Nortel shareholders would benefit from a diversified and much more flexible investment.

You say . . .
Why is this a good idea:
1. Current model is broken. This doesn't mean that YOURS is a good idea.
2. It's a good way to attract capital. In the go-go years maybe, but have you been outside lately? Right now it's definitely not a good way to attract capital. In the future something like this might work, but nobody is sure when this future will come and if NT would still be around at that time.
3. Shareholders benefit from diversification. THIS IS COMPLETE BS and has been shown to be so time and time again. Think "fund of funds".
In real world, shareholders only benefit from better risk/return profile that could come from integration, economies of scale, but mostly just come from GOOD PEOPLE PROPERLY MOTIVATED TO DO HARD WORK.
Nobody benefits from another layer of management delivering "diversification". Think trenches of subprime mortgages. They told you they were diversified, never mind a 1:1 correlation + funny math making AAA out of BB- securities via a "priority" scheme based on meaningless historical defaults delivered by careful data picking. Management fees were great though! And they should have been, having so many creating individuals working together on this thing.
The bottom line is, extra layer of management = extra management fees, extra conflicts of interest and extra hidden risks. If shareholders want to diversify they would do a much better job on their own without paying 12M to MikeZ for agreeing to do a half ass job of it for them, while keeping his own interests well ahead of theirs.

Mr Real - regarding your points.

#1 - No, it sn't automatically mean that my idea is a good idea - but it's an idea. What is your idea?

#2 - No question that the markets are problematic right now, but even so, my point is that it's a 'better' way to attract capital than the current model. The current model is failing so it's foolish to stick with it and expect that things will just get better.

#3 - Strong visionary leadership is inspiring. The current leadership team is neither strong nor visionary. They are six-sigma excel jockeys and are clearly uninspiring. If you put more focus around each business and install strong leaders who understand the market you're in, I think you'd have a much greater likelihood of success and a much more highly motivated team.

The are pluses and minuses with any corporate structure. MZ and his team are not fit to run Nortel in it's current structure. My post was just theorizing on a model that might be a better fit with their backgrounds. To be honest, I'd be just as happy to flush them and replace them with a team that knows what it's doing.

My idea is that NT will keep trying to find itself for a while.
6sigma monkeys will continue to do what they do best.
Flushing out one expensive group of managers with another is probably not something NT can afford right now.
I hope that credit market will improve and NT will be able to sell a few divisions eventually. At some point NT would get too small for 6sigma boys to keep milking it and they'll move on to greener pastures. Once it is small enough there will be plenty of regular, "cheap" people capable of running it properly.
I just hope that all of this downsizing happens soon enough otherwise it may have to go into ch11 and do essentially the same type of thing that way.

So what are the product and portfolio Issues?
Oh yea...I forgot ...you DON'T work there!!

If you work there and are representative of the other people who do, then the stock is over-priced.

Can anyone tell me what the book value of Nortel shares are; that is, the average price of what people paid for a common share. Have long-term investors who were in at $100 ($10 pre reverse split) sold out at huge losses?

I'm sure the book value, or average of what people paid for Nortel shares, is at 10X, 20X, 30X what the current share price is.

Share volumes being moved (sold and bought), even after Sep announcement have been only a small percentage of the 450 million plus shares.

My feeling is that 10% of the shareholders buying/selling/shorting over that last year are controlling the stock price and making it plummet. If there was a huge buy demand, the stock price should logically go way up.

The 90% of investors who have bought at 10X, 20X, 30X or more of the current stock price will never sell at this level. How can anyone get control?

Should have,
The book value of NT shares is not what your purport it to be. Rather, it is arrived at by dividing total equity (assets minus liabilities) by # of shares outstanding on the balance sheet date.

NT has approx. 497M shares outstanding and the avg daily volume has been about 8M shares. So NO, 10% of shares held is not the avg daily volume but rather a much smaller figure, 2%, that is determining NT's market cap.

The stock market is but one thing: emotional

Nortel watcher, thanks for providing an explanation of shareholder equity but this really mean the average cost of what people paid for their stock? That is what I'm trying to determine, not some accounting methodology.

book value is a very overloaded term.
see here: http://en.wikipedia.org/wiki/Book_value
I think Nortel watcher was describing "shareholder equity" per share. that should be a negative number if calculated properly, when only taking into account "real" assets, and real liabilities, for example, i wouldn't count intangibles, goodwill, PPE, etc and minority interest.
anyway, i think that number is negative for NT.

now back to what you want :)
I think for a company like NT that has significant institutional ownership you should be able to use avg PPS paid by institutions that are still holding as a proxy for avg PPS paid by all shareholders who are still holding.
Determining that value should not be very difficult, you should be able to get a list of transactions form one of the databases.
For example AOL finance gives you Value of shares is estimated based on the closing price of the month in which the shares were purchased. You have to account for the fact that insiders often get shares for free, so I wouldn't count them as representative, but you should do OK with Institutional investors, mutual funds, etc.
you might start here:
http://finance.aol.com/company/nortel-networks-...

Let us know what value you arrive at :)

Nortel now 834 million. it will soon become 600 million.

any investment bankers here. can you comment on a market cap that is a quarter of total cash on hand and less than a tenth of total revenue. dont see this happen unless the company is getting wiped out like the financials.

From an "investment banker wannabe", i.e. myself:
i can comment on one thing. when looking at a company it is important to look at the enterprise value, not at the equity alone.
So you statement that "Nortel now 834MM will soon be 600MM" is not a good basis for any analysis of this situation.

The market cap is not realistic and not true value in the event Nortel is sold off in pieces or as a whole entity. Even with the debt, there is tremendous value in the company. The Market just keeps kicking at the stock while it is down. It can come back up as quickly as it went down though.The stock dropped close to 3.00 on Sept.17. It should easily get back up in that range in the next few weeks. Any "good news" announcement will move the stock..just wait and see.

I sort of agree with "more" here, your question defies logic.

NT market cap is around 8-900 million. If I was a competitor, why would I
buy MEN for 1-2 billion, when I could buy 51% or controlling interest of the NT Enchilada for 4-450 million? Loot NT's products, markets, R&D, pension fund. Profitably spin off a few divisions that aren't needed, use NT's cash reservses to pay off any long term debt, and default on any remaining debt by declaring the old "NT" bankrupt. Fire all the board members and purge the place of any members of the church of SixSigmatology.

So pay 2 billion, or for 25% get all the wealth, research, market share, and eliminate a competitor in an already crowded market.

That was how it was done in the 80's.

if I had the money I'd do this. but its not possible to buy 51% now as shares are fragmented across a lot of investment funds who will not sell. but also a lot of laws including labor laws.

it could be happening. by law there has to be adequate notice to employees which they have given prior to transferring assets / employees over.

If the current owners of the company, the shareholders, do not get what the company is worth, which includes the portion of value that we think exceeds the current market cap, they'd never approve a sale....

If breaking the company up reveals hidden value, it belongs to them first...I see no way around that

Management is where our problems are. The upper level management is so hell bent on implementing six sigma they are not seeing the damage it is doing to our product quality and in turn product name....So frustrating seeing the demise of a company from the inside while all these upper level exec's tout how great there ideas are.

Mike Z has got to go. We need a big change....Mike Z...going private...I don't care..just needs to happen soon!

article on bankruptcy but from a perspective of customers cancelling orders introducing a new vicious circle.

http://www.nationalpost.com/todays_paper/story....

Maybe Silver Lake would take them there, package up the pieces they own of Avaya and they'd have a very large portion of the Enterprise space telephony software and service market.

going private makes sense at this point. provided its done right. meaning restructure properly, get rid of fat and deadwood, streamline operations and give employees some stock. then in 2-3 years go for an IPO.

another reason is public view of its books and competition. customers will never buy from a business going down in revenue and share.

in fact take it private, file chapter 11, fire Z and gang as well as deadbeat management, then restructure. employees on the ground know better than Z on what is needed at the company. empower them.

NT has enough to debt to worry about, let alone spending a billion dollars to buy out the shareholders. But when the market cap does fall to $500 million, it would probably be better for its ego to go private

This question is outright goofy.

Going private makes sense if Nortel's public accounting costs are so high that they are the sole cause of it losing money. Compliance to Sarbanes-Oxley is a b!tch, but that is ^far^ from where Nortel's problems lie.