Nortel CEO Mike Z: The End is Near

By Mark Evans | Published: June 21, 2009

It’s been awhile since the last Z-Mail but with the proposed sale of Nortel’s CDMA business and LTE R&D unit to Nokia for $650-million, the time must have seemed right for a presidential update.

Putting aside the deal with Nokia, the most striking part of Mike Z.’s message is Nortel is “advancing in discussions with external parties to sell our other businesses”.

Translation: The restructuring process started when Nortel filed for bankruptcy protection in January has evolved into a full-blown asset sale. As a result, there’s no chance of a New Nortel emerging. Instead, Mike Z. will be wheeling and dealing until there’s nothing left. It’s not like anyone should really be surprised that Mike Z. is gutting Nortel but that he’s publicly admitted strategic defeat.

Team Nortel:

It has been a long journey since our January 14 announcement. Nortel has been battling against a tough marketplace and the effects of our filings for creditor protection. I want to thank you for your efforts to stabilize our business, preserve our customer relationships and face the task at hand with both a sense of reality and optimism. You have driven hard and with a sense of urgency to close business and move this company forward under the harshest of circumstances. Your dedication and hard work have been inspiring.

Today, I want to share some news with you on Nortel’s and your future, to provide some clarity around our decision-making process and what lays ahead. As you know, evaluating our businesses to determine the ultimate path forward has been our most critical priority. On May 11, we said we were working to maximize the value of the company, while preserving our innovation platforms and employment to the greatest extent possible. We also said that we had been in discussions with external parties around a number of our businesses. I am pleased to announce that these discussions have progressed and that today we:

- entered into a “stalking horse” sale agreement for our CDMA business and LTE Access assets with Nokia Siemens Networks for US$650 million.
- are advancing in discussions with external parties to sell our other businesses.

I know you are eager to hear what this means for Nortel, and for you. You will be hearing first from your business leaders in greater detail at live GISs starting on Monday, then I will provide additional comments in a company-wide video before the week is over. But first, let me briefly provide some context around how we reached these decisions.

In early 2006, we set out on an ambitious path to transform this company – to significantly improve our operations and cost structure, and aggressively shift our economic center and investment bets from legacy to the high-growth segments of the market. You have made tremendous progress on many fronts – capturing our customers’ appetite for innovation with cutting-edge technologies like 40Gig/100Gig; LTE, CVAS and Unified Communications – transforming our processes and improving our product quality and customer service levels – while fixing our significant accounting and legal issues. Our strategic intent was to drive industry consolidation through organic growth and acquisitions. While we made considerable progress, we could not achieve the financial leverage required to lead this effort, especially with the economic downturn and credit crisis.

Let me be clear. Together, you have created real value for this company, and today’s news and the ongoing and tangible interest in our businesses and intellectual property by other parties are solid proof points. Our priority going forward will be to leverage that interest to maximize the value you have worked so hard to create. Around that, my focus continues to be to do everything we can to ensure our customers continue to benefit from Nortel innovation and that as many employees as possible have the best chance to move with our businesses as they potentially move into other companies.

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Best Path Forward for Wireless

As we evaluated our businesses it became clear that a sale is the best path forward for our Wireless business. This decision allows this business to preserve the significant value inherent in its know-how and leading-edge technologies and solutions, particularly if it is consolidated in companies that can bring greater scale to the marketplace.

You have built this business into a strong player in the market and a valued asset in the industry. Nortel is the second largest supplier of CDMA infrastructure in the world – we do business with three of the five top CDMA operators globally, including Verizon Wireless, which operates the largest wireless voice and data network in the United States. With strong customer relationships globally, you have driven differentiation and competitive advantage through deep innovation in the wireless space.

At the same time, the leading innovation and capabilities of our 4G innovations have been driving our world toward true mobile broadband. Our LTE capabilities have been well-received by key global carriers and are very complementary to the LTE efforts of Nokia Siemens. The inclusion of certain of our LTE Access assets means that Nortel-grown innovation will remain at the forefront of the next wave of wireless networks. We should all be proud of the many Nortel employees who have contributed so much to move 4G forward—their legacy is an important one.

“Stalking Horse” Process

It is also extremely important to understand the processes around the wireless sale agreements. In the U.S., this sale requires a court-approved bidding process, known as a “stalking horse” or 363 Sale under Chapter 11 of the U.S. Bankruptcy Code. Consummation of the “stalking horse” transaction is subject to higher or otherwise better offers.

This “stalking horse” process is controlled and prescribed through the courts and we must ensure it is a fair and open one. You will see very limited discussion around what a combined business would look like as we cannot favor the “stalking horse” purchaser over another potential bidder. There will be no business or portfolio integration taking place until the process has been completed and definitive purchase agreements are in place. During this time, employees must remember that they should continue their ongoing duty to act in the best interest of Nortel and not any potential purchaser.

In addition to the auction process and Ontario Superior Court and U.S. Bankruptcy Court approvals, the agreements are subject to other customary approvals, including government approvals such as in Canada and the U.S.

Advanced discussions to sell our other businesses

Since the beginning of the filing process, our focus has been on preserving the value of our businesses – our technology, customer relationships and the know-how of our people – in the face of a contracting and consolidating global market. We had every intention of leading that consolidation, as it is clear that there will be fewer players in our industry in the future. It is clear now that Nortel will not be one of them in our current form. But, to maximize the value of our businesses, we will leverage the opportunity that consolidation presents.

There are important implications that flow from this decision that we must be very transparent about. If we are successful in selling our other businesses, Nortel will not emerge from the process that began with our filings for creditor protection. Nortel will apply to delist its common shares and the NNL preferred shares from trading on the Toronto Stock Exchange. We do not expect that the Company’s common shareholders or the NNL preferred shareholders will receive any value from the creditor protection proceedings, and we expect that those proceedings will ultimately result in the cancellation of these equity interests. If we are not successful in finding buyers, then we will evaluate other alternatives for those businesses at that time.

We have continually sought a solution that would allow us to emerge from the process and continue writing the history of this storied company. We have looked at every possible alternative, but we believe that this is the best path to provide clarity to our customers and employees, preserve the innovation that is the Nortel heritage and maximize value for all creditors, including Nortel employees and pensioners. For some this will mean a potential path forward in a new home. For others, it will mean an end to the uncertainty and a need to move on to new opportunities. I am confident that this is the truly the best outcome.

The Road Ahead

We still have much work ahead of us. Continuing to stabilize our customer base, even as our businesses possibly become part of other companies, is key to achieving the best return on these assets. Working to preserve that value is important to all of us and other stakeholders.

One of our top priorities will be doing everything we can to ensure successful integration with the acquirers of our businesses. Capturing the full value of Nortel’s strengths will be their objective, and we must do everything in our power to see that happens. I am deeply committed to achieving that goal in the coming months.

I want to assure you, as we move forward, we will make every effort to be transparent around the sale of any of our businesses and the timeframe for filing our final plan with the courts. There will be many questions you will have and we will try and answer them to the best of our ability.

I want to again thank you for your hard work and dedication over the last few months – and for so many of you – years at Nortel. There’s no question, the know-how and innovation that began at Nortel will continue to influence and lead our industry as our businesses and many of our people find new homes under new banners. The new players created will have every opportunity to succeed precisely because they are standing on your shoulders.

Thank you for all you are doing for Nortel,

Mike

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  • protosphere

    …and even more

    http://www.theglobeandmail.com/globe-investor/n…

    The federal government could have prevented the liquidation of Nortel Networks Corp. (NT-T0.18—-%) with a massive bailout, but instead Ottawa has decided that the best way to salvage something from the biggest corporate bust in Canadian history is to help fund a foreign breakup.

    Through the Export Development Corp. (EDC), which normally helps Canadian exporters and investors expand their businesses abroad, the government will provide $300-million toward a credit facility for Nokia Siemens Networks' $650-million (U.S.) bid for Nortel's wireless assets.

    In return, the Finland-based equipment company has promised to keep at least 2,500 Nortel employees, most of whom are based in Canada and the United States.

    “Part of the commitment was that we would ensure that we kept jobs in Canada,” said Sue Spradley, head of North American operations for Nokia Siemens.

    The unusual turn of events highlights the lack of confidence Ottawa has in Nortel's leadership to turn around the company after it entered creditor protection Jan. 14. The EDC, for example, was only willing to provide $30-million (Canadian) of support to Nortel until July 30. And despite numerous meetings between Nortel's senior management and members of cabinet, the government proved unwilling to back restructuring efforts.

    The decision acknowledges a new reality in the telecommunications landscape, where larger and better-run players have risen to dominance and will increasingly decide how much research and development gets done by Canadian engineers and scientists.

    China's Huawei Technologies Co. Ltd., for instance, is planning to bring several hundred R&D jobs to the Ottawa area in the next few years. The company has more than tripled revenues since 2005, to $18.3-billion last year, by combining cheap prices with reliable technology. It says it employs more than 80,000.

    Nokia Siemens, meanwhile, has also been adding R&D staff to Canada in recent months. The company was created in 2007 as two tech giants (Nokia Corp. and Siemens AG) decided they needed greater global reach to compete in the field. The company employs about 60,000, and with offices around the world is able to focus on R&D around the clock, says Ms. Spradley, who served as president of global services and operations at Nortel before joining Nokia Siemens in 2007.

    Huawei and Nokia Siemens won an approximately $1-billion wireless contract in Canada last October, securing the contract to upgrade BCE Inc.'s Bell Mobility and Telus Corp. to a new, jointly-owned wireless network.

    Canadian policy makers are being forced to play a weak hand to ensure some Nortel jobs remain in Canada. But the situation leaves the long-term strength of the nation's technology sector unclear.

    Besides being the greatest spender by far on R&D in Canada ($1.8-billion to Research In Motion Ltd.'s $254-million in 2007, for example), Nortel has also spawned at least 260 technology startups over the years, and played a crucial role in funding research partnerships with universities that have helped turn pure research into industrial research.

    “Other high tech leaders have not been very good at supporting university research,” said, Richard Van Loon, the former president and vice-chancellor of Carleton University. “Nortel has been a big funder, but a broken up Nortel isn't going to be able to do that.”

    Mr. Van Loon fears that without Nortel's commitment to universities, Canada will fall to the bottom of the rankings for industrial R&D within the Organization for Economic Co-operation and Development.

    Michael Urlocker, an analyst with GMP Securities L.P., forecast last October that Nortel would have to sell all its assets because there was no path to sustained profits. He said Friday's news will be hard on individual stakeholders, but not necessarily the country.

    “If the R&D is not relevant to customers, or ultimately produces products that can't generate sufficient profits to sustain the company, which was the case for Nortel, in my opinion, as tough as it is to say, it is not a significant loss to the nation,” he said.

    “My sense was that the probability of success of Nortel achieving an operational turnaround was near zero and therefore selling assets immediately was the best option. Clearly, management overestimated their options and considered that they could turn it around.”

    Nokia Siemens, in fact, had been talking to Nortel executives as far back as last September, when Nortel chief executive officer Mike Zafirovski announced the company wanted to sell another of its divisions, called the metro Ethernet networks unit.

    Ms. Spradley said Nortel's wireless assets offer a natural way for her company to expand its market presence in North America, but she wanted to wait for the bankruptcy filing before bidding.

    “We wanted to see where Nortel was going, and what they wanted to do with their customers. It was nothing negative. It's just the way it needed to run,” she said.

    Nortel has made clear that its wireless assets represent the first phase of liquidation, reporting Friday night that discussions are moving forward to sell the remaining pieces of the company. Reports put the value of liquidation of all of Nortel's assets at less than $2-billion. Yesterday, Ms. Spradley would not rule out her company's interest in some of those assets.

    Nortel has been in talks to sell its enterprise unit valued at less than $500-million to two potential suitors, according to The Wall Street Journal. They are Avaya Inc., owned by the private-equity firms Silver Lake Partners and TPG Capital, and by Siemens Enterprise Communications, which is majority-owned by private-equity firm Gores Group LLC in a joint venture with Siemens.

    As lawyers and bureaucrats put the final touches on the wireless agreement last Thursday, the House of Commons standing committee on finance had ordered Nortel chief executive officer Mike Zafirovski back to Ottawa to answer for his decision to cancel severance pay, cut pension payouts and award $45-million of bonuses to remaining employees.

    This morning, Nortel shares will be suspended before the opening of the Toronto Stock Exchange, where they have traded since 1973 when the company went public. Nortel said it will apply to delist the shares.

  • fatzoff

    To Mr Z

    Happy Father's Day

    You have ruined so many fathers and childrens futures over the last few years. All those scholarship funds that have simply evaporated because of your lies. We are so happy daddy Z that you are able to send us to such preppy schools, and the hell with all of them. If the Z boys don't look after themselves, who will?

    From your sons Matt, Kirk and Todd

  • SomewunElse

    I suspect it will be held in escrow pending the financial-restructuring portion of the overall court approved restructuring plan. The money simply replaces the asset in the overall estate, and the creditors will decide (along with the court, the Board, etc.) on how it gets divided once the dust starts to settle.
    I don't think it's available for the company to spend, so has no impact either way on severance, pensions, or the like – just gets pooled with other assets.

  • Blogger4life

    Nice to hear that the “new players” are now “standing on our shoulders”. Perhaps they can balance themselves well enough to pull the knife out of the back of Nortel employees.

  • less

    “Nortel thinks”. Yeah, Nortel has the industry right where it wants it to be

  • whatnext4nt

    Except for some inter-company loans, there are no secured creditors; this was confirmed by Mike Z and the Nortel Lawyer in the Canadian Parliamentary committee discussions. If you look into the CCAA and Chapter 11 documents, you will also find this to be the case. Some members of the committee are planning to propose amendments to Canadian bankruptcy laws to make severed employees and pensioners highest priority creditors.

  • InTheRoundEye

    There's NO better feeling than “I told you so”….

    “Perhaps even more painful for Zafirovski was the role played by Susan Spradley, the head of Nokia Siemens' operations in North America, and a former senior Nortel executive. Shortly after Zafirovski was hired as Nortel's CEO, Spradley reportedly told her new boss that his game plan — which involved trying to restore Nortel to its former greatness rather than narrow its focus — was bound to end in ruin.”

    And so it did.

  • ExNtrl

    Sorry for the slip :D I was feeling generous.

  • protosphere

    “precisely because they are standing on your shoulders”

    oh no, yet another punch line…

    precisely? he's kidding…right?

  • NortelEmp

    Interesting use of the metaphor “standing on the shoulders of giants”.

    (http://en.wikipedia.org/wiki/Standing_on_the_sh…)

    Ridiculous use of the word “precisely”.

    This zmail has a different writing style than the last few. Looks to me like Mike has a different speech writer – someone who likes to use lots of adjectives and is not afraid of long sentences. Maybe Ron was Mike's speech writer and now that he's gone, someone else had to step in.

    Whoever is writing them must have to close their eyes and pretend they are in never never land, just so they can accept the fantasy they are spinning.

    I certainly would not be a proud employee if I was the one to write these.

  • broadbandbill

    Nothing to take away from Ms. Spardley (a very capable exec, I hear) there were several top industry analysts and then-Nortel sympathizers practically begged him, myself
    included. Not only did he NOT listen, he actually thought we were all punks with very limited capabilities whose advices are not close to being qualified.

    My most often and frequent advice to him was to “think small” and here he is, doing small. Poetic justice just caught up with the boy…–bb

  • broadbandbill

    Let’s not forget that if the GEngsters were smart enough to divest Nortel of its wireless portfolio (CDMA + LTE) even 2 years ago when Nortel’s LTE had a clear head start w/Verizon, Nortel would have pocketed over $2B for its wireless unit and would have had the much simpler task of focusing on synergistic Enterprise/MEN units. Thus, it’s not correct to state $850M down to $650M but rather, $2B down to $650M, while ‘world classers’ pocketed over $100M in combined compensation during this time. A-fricking mazing…–bb

  • ChaiTea

    http://www.theglobeandmail.com/globe-investor/n…

    >In return, the Finland-based equipment company has promised to keep at least 2,500 Nortel employees, most of whom are based in Canada and the United States.

    How is this possible?

    Majority of CDMA and LTE has been offshored by our crappy executives like Noy and Graham Richardson (for CDMA) , and Larry Murat (for LTE). In CDMA BSC 80% is offshored, OAM 80+% is offshored, BTS is 90% plus offshored, MTX is around 50% offshored. Product Verification teams are mostly outsourced, GPS was forced to offshore a big part of their team.

    Where the heck are the majority of the 2500 jobs in CDMA & LTE that are suppossedly based in USA & Canada, for which EDC provided the 300 M$ funding?

    Mike Z and his cronies have duped every one so far, and I wonder if they are duping EDC as well?

  • IdontBELIEVE

    This may or may not surprise you… but Z has lied to all again!
    (or possibly he does not understand the bankruptcy process in Canada, which should scare us even more… although not surprise us!)

    There definitely are SECURED, UNSECURED, PREFERRED and DEFERRED creditors under Canadian Law, check with any Lawfirm or Lawyer.

    Section.2 of the Bankruptcy Insolvency Act (BIA) http://laws.justice.gc.ca/en/notice/index.html?… defines a “creditor” as a person having a claim,

    1 – Unsecured, preferred by virtue of priority under s.136 of the BIA
    2 – Secured, that can be proved as a claims under s.124 of the Act.

    The creditors may be divided into four categories, and you can bet your a$$ that government is first in line along with prefered bondholders and shareholders. (like Z and his cabinet)

    the condensed version is available on Wikipedia; http://en.wikipedia.org/wiki/Bankruptcy_in_Cana…

    Z's lack of knowledge and experience in managing a company going through bankruptcy has constantly led to significant negative impacts again and again… And it not over yet, he will prove his worthlessness once before this is all done!

    But what can we expect from someone who made over $10M last year, yet still says he has no funds for his sons tuition…

  • GoProto

    Unfortunately.. it seems that once they get a taste of the blood money made off of others sufferings .. their souls wander aimlessly for eternity.. not so much lost, but discarded in the need to fill the hunger and ambition for that “better life”..

  • InTheRoundEye

    No kidding.

    My son has gone from a fully paid four years at Yale, to now IF he's lucky I might be able to send him two a welding school at a community college.

    - ITRE

  • LTE_Engineer

    Most of LTE development is in Ottawa.

    The Beijing teams working on LTE hardware no longer exist. I'm not sure about LTE software teams in GDNT.

  • The psychiatrist

    “My son has gone from a fully paid four years at Yale,”

    wow you guys were on the gravy train before Mike got his sticky little hands on Nortel.

  • The psychiatrist

    pocketed over $100M in combined compensation during this time. A-fricking mazing…

    So bb how is it that Z and his team were able to convince the judge overseeing the bankruptcy process that setting aside $43 million in “retension bonuses” were absolutely necessary in order to keep those so called “key employees” from fleeing when collectively it was them who caused Nortel to settle for $650 m instead of the potential $2b they could have gotten by way of their stupidity,not to mention that now because of the fact that many of Nortel's creditors wil be getting pennies on the dollar.

    I'm not mistaken doesn't a special request as in this $43m they wanted for retension bonuses have to be presented in front of Nortel's current creditors,especially the so called secure ones?

    If that is the case then we must all give Mike and the BOD credit for pulling this one off especially now that these so called key employees will no longer be seen as key once the rest of Nortel's businesses are sold off.

  • MikeZ_ElPresidente

    Ladies and gentlemen, uh, we've just lost the picture, but what we've seen speaks for itself. Nortel has apparently been taken over, 'conquered' if you will, by a master race. It's difficult to tell from this vantage point whether they will consume the captive Nortelians or merely enslave them. One thing is for certain: there is no stopping them; they will soon be here. And I, for one, welcome our new overlords. I'd like to remind them as a trusted manager , I can be helpful in rounding up others to toil in their underground cubicles.

  • OzNortel

    What do you expect from a product of Titos Yugoslavia? The guy had visions of himself as AlexTheGreat on Bukefalos cutting the Gordian knot, in the end he just turned out to be a cheap immitation like those Rolexes they sell outside his COEs in China.

    The ultimate tragedy here is that Canada has lost a technology powerhouse while Zudas laughs all the way to the bank.

  • exnt_x_2

    Nice point.

  • exnt_x_2

    …the ongoing and tangible interest in our businesses and intellectual property by other parties are solid proof points”

    and in return we get nothing…….

    Uhm, that's what patent royalties are for. Or did you just sign complete ownership of yours over to Nortel?

    If you did, that was your choice.

  • dljvjbsl

    I worked at BNR in the 70s. In those days, we had the feeling that we were part of something new and significant. Nortel had its problems. It almost went under in the id-70s with transition from SP1 to DMS. No customer wanted to be the last one to buy SP1 and so sales dried up when word of DMS leaked out. However this was an issue with the success of two great products (SP1 and DMS) and not an expression of a badly managed company as its happening today.

    This is a very sad occurrence. It is another Avro Arrow for Canadian technology. We had the chance to do something great and lacked the ability and confidence to follow through

  • protosphere

    So much for your “when they restructure” speculating TongeInCheeks.

    No more of your “guesses”…please.

  • broadbandbill

    These guys are very experienced thieves, they found yet another way. I would like to remind everyone that is exactly what 'One Happily Retired Cisco Exec' posted on this blog a while back regarding Z and his style…–bb

  • zeroman

    written by his executive assistant

  • zeroman

    send him to welding school. you were probably part of the decision to offshore everything at nortel, like most other executivs at other companies. there is nothing much left for him to do here. or get him to learn mandarin or indian.

  • XPM_guy

    The lawyers, of all stripes, get their cut off the top. Also, contracts entered into since filing get honored first (e.g. contractors, or the $200mil loan Nortel US made to Nortel Canada to fund operations there). Then, last, come the unsecured creditors, who get equal pennies on the dollar, based on what's owed them. This includes severance owed and even Bill Owen's remaining $2mil of retirement bonus. Given the rock-bottom prices Z is getting (what a salesman!), it will turn out to be very few pennies indeed – perhaps not even enough to cover postage…

  • XPM_guy

    As part of the intellectual property agreement all designers must sign as a condition of employment, all patents based on work done while in the employ of the company belong to the company. This is standard practice, otherwise the companies underlying technology would be at the mercy of individual designers, who could walk and demand royalties at any moment. No tech company is going to allow that! To grab that golden ring, the work must be done independent of a parent company…

  • broadbandbill

    I agree on his Alex the Great vision; warned him about the same over 3 years ago. Reminded him that AtG didn’t listen to his smart advisors either.

    However, Tito NEVER suggested that his disciples sell their souls for a buck; Z learned that art form from Jack (the-blue-eyed-Devil himself) Welch…–bb

  • zeroman

    Z, Hack and others are absolutely pissed off with the events of him being pulled in front of parliament. apparently they are now in a revengeful state to sell everything for bargain basement prices to spite the government.

  • yes4aapl

    the time must have seemed right for a presidential update.

    Putting aside the deal with Nokia, the most striking part of Mike Z.’s message is Nortel is “advancing in discussions with external parties to sell our other businesses”.

    Translation: The restructuring process started when Nortel filed for bankruptcy protection in January has evolved into a full-blown asset sale. As a result, there’s no chance of a New Nortel emerging
    —
    re
    a presidential update.?
    Don't be ironic, Mark.
    Most media outlets say Mike Z gave up restructuring of Nortel.
    Is it true?
    I knew that he was the last one /3-5 year Plan/ destroying Nortel so how he would be the savior under BK protection restructuring?
    nope
    Mike Z has no idea how to save Nortel.
    but
    the deal with Nokia is a good move
    the price tag of $650 mill for wireless sets the new bidding war /I hope/
    What about veterans now? Save Nortel, group…
    They are challenged with the new reality. Their hope for $1 bill is gone, I guess. Wireless plus enterprise now is more than $1 bill sold piece by piece…
    question to Save Nortel group
    Are you still in the game?

  • ariador

    Would it be possible for you to give the link? It sounds like a really interesting take on you-know-who

  • sleepingbeauty

    As I understand it, Nortel in the US is a secured creditor for Nortel in Canada.

  • henrylow

    There's a movement to radically change California government, by getting rid of career politicians and chopping their salaries in half. A group known as Citizens for California Reform wants to make the California legislature a part time time job, just like it was until 1966.

    latest trend

  • henrylow

    There's a movement to radically change California government, by getting rid of career politicians and chopping their salaries in half. A group known as Citizens for California Reform wants to make the California legislature a part time time job, just like it was until 1966.

    latest trend

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