Guest Post: The New Nortel Post-Restructuring

That isn't looking likely now after the ciena rumour on here.

With Doug Wolff's departure, Nortel's CDMA business is walking dead already. Sell it quick! There is nobody left to run it so it's about to go into a deep death spiral.

And Duncan, the problem with Nortel's VoIP business is that it is the best functional solution right now – which is why it sells – but it is a dead-end. There is nobody left in Nortel who can paint a credible vision of where a Nortel VoIP solution is going to take you and there is no R&D program to evolve it. Just lots of black belts feeding at the trough and pontificating over ways to reduce costs.

I disagree with the 2nd point. The Nortel carrier VoIP footprint is significant as is the technology and on-going R&D. You do not get to #1 in Carrier VoIP for 5 years running on hype and black belt B.S. I do agree the Executive have not been talking about it much though, which is a long running mistake. Remember this is carrier VoIP, much harder to pull off than Ent cpe VoIP The requirement is that residential and hosted business VoIP is going to grow. It will according to the analysts (perhaps slowed down for now) but very complimentary to the rollout of DSL FTTH and business fiber access and soon, 4G wireless.

The leaders who developed the VoIP product that has been #1 for five years running are long gone. The current owners are caretakers, not visionaries. Eventually, the value of the Nortel VoIP product erodes unless it is renewed, and there is no leadership in place that has a clue what is going on in the market or where to take the Nortel portfolio. “Fix the CSRs” is not an evolution strategy.

I agree that a acquisition of Nortel by Silverlake/TPG (Avaya) would be an absolute kiss of death for the employees and any valuable portfolio remaining in Nortel's enterprise division. Silverlake/TPG are still stinging over shelling out $8.3B for the bad ship Avaya. They've been shipping of product support to India and shutting down sites since (Ottawa offices gone; Lincroft gone, Denver a ghost town, all UK offices slashed, Tenovis sites slashed).

The Nortel employees in enterprise had better hope for acquisition by the group that bought Siemens Enterprise, or a large public enterprise focused company.

Well said.

One of the considerations in building a new Business Plan needs to be Brand Relevance. This includes answering business questions such as:

- How do customers purchase?
- How do customers value and depreciate the asset?
- Are the customers impacted by Regulators such as the CRTC or FCC?
- What is the planned lifecycle for the products and broader infrastructure?

When you consider these kinds of questions the Nortel brand has the best relevance in Service Provider customer segments with Voice and Backhaul leading the way followed by Wireless. Enterprise has a lower brand value given that many Enterprise customers will depreciate the asset over a 3 to 5 year period compared to Service Providers that depreciate over a 10 to 20 year period with direct influence from the various regulators.

It is well known that Nortel holds the #1 market share position globally for Carrier Voice. The market opportunity over the next 5 years is the transition from Analog/TDM Home Services to IP-based Home Services. There is hundreds of millions of ports in play for that market opportunity along with the increased backhaul bandwidth requirements to support the IP traffic.

Service Providers will invest in this transition if they see an opportunity to increase ARPU. ARPU can be increased through service bundling and through new features. As an example, look at the latest models of HDTVs. Many now have an Ethernet/IP connection so they can capture Internet content and Widgets to display on the TV. Work is being done to provide TV-based Visual Calling Line ID and Call Control so that you can manage your voice calls with your TV remote control. All of this demands a transition to IP for home services and creates that new ARPU model Service Providers want to sustain and grow their businesses.

With these factors in mind it makes sense to drive a business model that can effectively respond to the customer needs. Regardless of the name of the company, it's all about the customer.

I never said that Doug Wolff was still the leader of CDMA when he left and I stand by my statement.

As I said, with Wolff's departure, there is nobody left who can effectively run the CDMA business AND, as scalpcutter points out, a lot of competitive information will go with Wolff to his new home (no, I don't mean technical information).

CDMA and GSM are going to be around for another 5 to 10 years so the departure of one person isn't going to have a dramatic impact on that business. Nobody is irreplaceable in any role in any company to the point it would severely damage the business.

There is a new Forum known as VoLGA created to define the standards for Voice over LTE. Until those standards are completed we can expect to see wireless voice to remain on CDMA and GSM with LTE being targeted at Data services.

Besides, consider the consumer cost associated with the migration of 500 Million CDMA users to LTE. It's going to take many years for that to happen.

CDMA and GSM are going to be around for another 5 to 10 years so the departure of one person isn't going to have a dramatic impact on that business. Nobody is irreplaceable in any role in any company to the point it would severely damage the business.

So using that logic, replacing Slattery with Hackney shouldn't have hurt the Enterprise business. Sorry, I disagree. I attribute 20% of the trouble Nortel is in to past sins of previous regimes and 80% to the failure of MZ and his senior leadership team to lead and execute over the past 3 years. One person does not make a successful business but when that one person leaving is the last person in Nortel with experience *running and growing* a wireless business, it's a significant event, IMHO. Who will replace him, another GEnius?

There is a new Forum known as VoLGA created to define the standards for Voice over LTE. Until those standards are completed we can expect to see wireless voice to remain on CDMA and GSM with LTE being targeted at Data services.

Agreed.

Besides, consider the consumer cost associated with the migration of 500 Million CDMA users to LTE. It's going to take many years for that to happen.

Yes, but all that means for Nortel is support contracts, not new business.

Executives can't succeed without strong teams and strong teams can't succeed without strong leaders, otherwise Mike Z and his sycophants wouldn't have been able to do so much damage.

Nortel VPs are indeed a dime a dozen now, but that is not the case at strong companies and that was not the case at Nortel during the period that BNR/Nortel grew to become a world-class leader in the Telecom market.

Help us understand then, why are parts of India, China and Africa rolling our CDMA networks to provide basic home telephone like services rather than investing in traditional land-line systems? Also, why are existing CDMA providers experiencing subscriber growth which demands more base stations etc?

Although CDMA saw a 10% decline in 2008 vs. 2007 revenues, it was still a $2 Billion business. That's not going to simply disappear overnight.

Doug is an excellent leader and made great contributions to CDMA and LTE, but it is ridiculous to say “With Doug Wolff's departure, Nortel's CDMA business is walking dead already”. However, I do agree with your recommendation that it be sold as quickly as possible, ideally bundled up with Nortel LTE.

Graham Richardson is a very efficient cost cutter and pragmatic manager and will run CDMA and GSM competently. The businesses will continue to shrink in revenue but will be profitable. Sell them as soon as possible and get some cash to pay off creditors, severance, pension.

“Although CDMA saw a 10% decline in 2008 vs. 2007 “
This is not true and misleading, it is in steep decline.
Nortel said -15% but an analyst found it to be more like -25%,

CDMA is fading in favor of GSM
CDMA accounted for almost all their profit (80-90% EBT) while already losing money for a decade

Nortel did not claim bankruptcy because it is booming

As for your India, China and Africa”
Ericcson replaced Nortel's faulty gear with India's BSNL and just won a $2B order with Verizon (without buying any of Nortel's business units)
China has lower cost Huawei and ZTE and Putian used Noika not Nortel. How much action in Africa, railways? Testra in Australia went down years ago. Next? What about BT, or endless other follies leading up to their demise.

Most of their business was in the US. not any more, Verizon is still their largest customer but Nortel is no longer their largest supplier, not only using others for LTE but Ericcsson just landed a $2B order with them, Sprint also anoither large US customer announced using others for their long boasted WiMax, a while back

Sorry to burst your bubble again. Do you work in Nortel's PR dept by any chance to claim “our CDMA” ?

For pete's sakes, please learn how to read Financial Statements as filed with the SEC. For the 2008 Form 10K on page 65 under Segment Information and Carrier Networks you will find Revenue numbers for 2006, 2007 and 2008 for CDMA, GSM and UMTS and Circuit and Packet Voice Solutions.

2007 CDMA = $2.425 Billion
2008 CDMA = $2.190 Billion

The reported difference is $235 Million and a Percent Change of 10%.

Given these facts as reported to the SEC, how can you say that my statement is “not true and misleading”?

you mean the stick of lit dynamite?

I think it's important to look at the internal structure to understand what is truly possible. Nortel has money in certain subsidiaries, but in many cases, the money cannot be taken from one subsidiary to fund another. This is not the same thing as one business unit funding another. Business units are convenient ways of organizing the company for the purposes of managing and market reports. Subsidiaries, however, are legal entities that come with legal restrictions. If parts of the company are to be sold off, it's important to understand which subsidiaries ties into which business units. If there is alignment, it might work. If there is lack of alignment, then it cannot work.

I do agree that it makes more sense to keep MEN and Carrier voice (comparatively speaking) as they are the most entrenched business units and probably represent the Nortel that most people remember (pre-2000). When they announced the selloff of MEN I couldn't believe it and I thought that of all business units, that was on the one to keep (or merge). Say what you want about services and solutions, but Nortel has never really had that kind of business unit. The most profitable part of the Global Services organization was the maintenance / service agreements that Nortel has had all along on their products. It could never stand alone (at least, not the way in which it was stuctured before they broke it up). So I agree with Duncan's view.

But I have to wonder if it's possible to contain the two business units intact while the others are stripped away. Nortel may have announced the realignment of the organization back into business units, but it has been a slow, painful and confusing process. On top of that, and probably more importantly, will the current subsidiary structure enable the transformation or hinder it? With so much services and support (on products) sitting in “centres of excellences”, Nortel loses economies of scale when large percentages of the businesses are pulled out. They may well be stuck with even more overhead then they have today and even more, relatively speaking, real-estate, that they will find themselves in much deeper than ever.

I am surprised about how little anyone on this blog ever talks about a fundamental issue that this company has. It's spread very wide and has little depth – geographically speaking. Yes, there are concentrations of employees in very “large” sites, but in many cases, these large sites actually represent smaller groups that align to business units and/or sales. On top of that, there are many smaller offices around the world, and many teleworkers. When the company was large, had many products lines, this reach was acceptable (sustainable), but as the company shrinks it's like a throwing a bucket of water as far down the driveway as possible: after a few minutes in the sun, the water separates and dries up.

The first day motions go through, in great detail, the internal transfer payments that occur on a quarterly basis, and also explain how much of Nortel's current cash is tied up in subsidiaries that, by law, cannot release it. Nortel is stuck in quick sand. Even the smartest person is the world would probably be at a loss to figure out how it can be saved. Personally, I think there is only one option: a complete dismantling through the selloff of whatever assets exist. There is still lots of worth in this company, but it could easily become worthless unless someone acknowledges where it's at and decides to tell everyone to stop kicking and stay still while someone pulls them out.

Bringing in executives from the outside is sometimes a good idea. But the huge downfall is that they might take a long time to figure out exactly what they have on their hands. Nortel is a hugely complicated company because it grew so fast in so many directions. While it grew, the executives held on tight to their centrally managed decision making process because it was growing not as a holding company but as a diversified company that wasn't really diversified (hence the constant struggle with centralized versus diversified R&D). When Z and his team came on board, did they have any idea of what they had. Really? My guess is that they had no idea and probably still don't, because there are probably few (if any) who really can figure it all out. It's like a big ball of silly string. It's hard to see how it's all tangled together and when you try pulling it apart, it just crumbles.

I love the Nortel that I have been a part of all these years. I'm mad that those who came in to 'save', who never listened closely to what people were trying to tell them. Instead they figured it was just “bad culture” and that anyone who argued with their ideas were preventing change. It was the reverse, in my opinion. Those who were most vocal about not doing certain things were the ones that likely knew for a long time where many of the major problems were. And just as they tried to get Z's attention, they also tried to get all the other CEOs' attention before them, Roth included. But the execs just kept on spraying their silly string and employees kept on trying to find their way out.

Sorry for the long post.

Who cares about the “leaders”. The R&D folks run the show and always will. Nortel has horrible leadership for 9 years, yet still retains the lead in VoIP. BNR may be gone on paper, but it is not in spirit.

Maybe a little Pollyanna but a couple things come to mind, from an Enterprise perspective I think someone finally realized that companies are not buying right now and if they are, it's not from a company in ch-11.

Internal rumblings say the $4.5B will be written down to around $900m and the pension fund is done, Nortel will not make any more contributions to it, most likely it will be taken over by the PBGC in the US, not sure what will happen with Canada.

I think what we are seeing now, is nothing more than valuation of the assets.

Don't be stupid. The leaders are those who supply funding and agree on direction with R&D. Without a strong leader, the funding dries up and it doesn't matter how good the R&D team is.

Nortel's leadership in VoIP is the result of DMS and Meridian programs from years ago. Nortel has not yet managed to jump the chasm and deliver a truly new portfolio and the clock is ticking. 'Spirit' isn't an entry on the income statement.

If this is true all those people getting lawyers are completey wasting their money. There will be no way they get anything.
Big creditors and lawyers get pennies on the dollar they lost.

You are right. That is the reason why they filed for bankruptcy protection. And also think that these selling division rumours are the ones which were made previously about the MEN sell off. Rumours are nonsense.

do you mean carrier VoIP or carrier networks (aka voip+wireless)? With optical lead in 40/100g, nortel is in a position to make money.. I can't see nortel sustain LTE much longer, considering every other player in LTE is significantly bigger (Ericcson, NSN, ALU, Huawei) right now. I don't know enough about carrier voip to comment on it. Wireless gotta be one of the saddest stories in Nortel history. Roth brought it up, and we did well in CDMA and that's it, we're very little in GSM, late on 3G, bailed out of wimax, and now lost verizon's LTE 1st built out.. I think it's only a matter of time before wireless is chopped.

Considering Wireless, our carrier customers are very concerned about the Nortel situation and don't want to replace their installed base which would be too costly. Then the customer is the real value to be bought in this business ! Hence, rather than “chopped” we could see this bought by the other big players by region and technology. My guess is NSN for Americas and CDMA, Huawei for GSM and EMEA, ALU for GSM and Americas, no clear idea for ASIA/China.
Of course, to reach this kind of deal, it must be deadly complex but I bet E&Y is pushing hard in this direction to serve our greedy creditors.