by Nestor E. Arellano and Greg Meckbach

Is Bid to Save Nortel Falling on Deaf Ears?

Jun 12, 200910 mins

A group of former Nortel Networks Corp. executives is mounting a bid to save the bankrupt Canadian tech jewel from imminent breakup. However, calls to the Canadian government to delay the sale of any of the company's assets until the group can raise enough cash to buy Nortel appear to have fallen on deaf ears.

A group of former Nortel Networks Corp. executives is mounting a bid to save the bankrupt Canadian tech jewel from imminent breakup. However, calls to the Canadian government to delay the sale of any of the company’s assets until the group can raise enough cash to buy Nortel appear to have fallen on deaf ears.

The bid to save Nortel comes nearly a year after Frank Dunn, former CEO of the Toronto-based telecom products maker was charged by the Royal Canadian Mounted Police with making false entries in the company’s financial statements. The charges have yet to be proven to a Canadian court.

“We want to make it clear we’re not asking the government for money. All we’re asking is that the government not allow Nortel to be scattered to the four winds,” said Ian Craig, who once occupied various executive positions at Nortel, including president for broadband and wireless communication and chief marketing officer, his last post before retiring in the 1990s.

Craig is now semi-retired but still serving in boards of various corporations including CAE, a Montreal-based manufacturer of simulation and technologies, and Suwanee, Georgia-headquartered broadband product provider Arris. He is a member of a group which includes, among others, Robert Ferchat, former president; David Mann, former vice-president; David Patterson, former Nortel director; and David Archibald, former Nortel deputy general counsel.

If they get their hands on Nortel, the ad hoc group, dubbed “Save Nortel,” intends to build up the company’s research and development arms and other assets such as its optical and carrier Ethernet, wireless and voice over IP divisions.

Ferchat said if his group were to acquire the company, it would not necessarily sell off the enterprise products.

“The plan is, if we can get in before the (units) are sold, is to acquire everything that’s left and take some time to sort through and see what it is we need to keep to make it a viable enterprise,” he said in an interview.

“I don’t know what the intellectual property involved in the enterprise business is, and the last thing we really want to do is to decrease our store of intellectual property, patents and cross licenses,” Ferchat said. “The current sales process would end up with nothing left and we’re trying to have as much left as we possibly can because we think there’s a huge and growing market for networks, particularly broadband networks.”

Meanwhile Nortel customers are awaiting announcement of the company’s restructuring plans.

A spokesperson for Nortel said the company cannot comment on reports specifically but added that business plans will be taken up if they are put forward.

“No decisions have been taken yet and we are exploring all options, including those from third parties if they are presented to us,” said Ryan Hill, an Ottawa-based spokesman for Nortel.

“If Ferchat and his group have a business plan to bring to the table, they can do so as part of our overall restructuring process,” Hill added.

The former executives are currently approaching financial organizations to help raise Cdn$1 billion — enough cash, they hope, to gain a seat in bargaining table and get a peek at Nortel’s most current data to be able to fine-tune their restructuring plans for the company. The group is not, Craig stressed, seeking a government loan, as previously by the Canadian Broadcasting Corporation.

“It’s sort of a chicken-and-egg situation. We can’t fine-tune our plan without getting into the data room. We can’t get into the data room without the money,” Craig explained.

Ferchat stressed the group is seeking equity investors, not a loan.

“We don’t wish to borrow that because debt has been the problem,” he said, alluding to the US$4.4 billion in loans already owed by Nortel when it applied for protection from creditors. Asked whether his group would you try to acquire the firm before it emerges from bankruptcy protection, Ferchat said: “that’s a question for lawyers.

“In the bankruptcy process there has to be a process for a significant reduction of the debt and what I think what that really means is you would probably convert a lot of the debt to equity. That’s just speculation on my part, but that’s the way everyone else has done it.”

In April this year, Ferchat met with federal Transport Minister John Baird, the Conservative Member of Parliament representing the riding where Nortel’s Ottawa campus is located. Baird then directed the group to Industry Minister Tony Clement, who is currently “looking into our plans,” according to Craig.

But he characterized the politicians’ reaction to their proposal as “cool.”

“I would call it the ‘silence of the lambs’. Everyone knows danger is imminent but no body wants to act,” he said.

Industry Canada has not responded to ITWorld Canada’s request for a comment.

Nortel filed for bankruptcy protection in January after years of troubled financial handling. The company has until July 30 to refine its restructuring plan.

However, sales remain down 36 per cent from the previous quarter as telecom equipment maker continues to look for buyers of its divisions.

The former executives claim their main motivation is to save jobs and keep the former Canadian tech darling in Canuck hands.

“Breaking up Nortel and selling off its parts to buyers will result in the loss of its flagship R&D centres and further loss of high-value tech jobs in Ottawa and other parts of the country,” said Craig.

The former Nortel executive said the current management team, led by CEO Mike Zafirovski, has got it all wrong.

“Zafirovski is trying to drive the company through process, not innovation, which is the actual strength of Nortel,” he said.

He said Zafirovski’s background was in “selling consumer handsets” for Motorola and was ill-suited for the demands of promoting enterprise-grade telecom networking hardware.

“You can’t run Nortel on 6 Sigma process alone. Sure, that worked for GE, but it took 15 years to gain traction. Nortel doesn’t have that much time,” Craig said.

Ferchat and his group are also lobbying for federal infrastructure money to finance the creation of a high-speed Internet network that will link the country’s businesses, hospitals, schools and other institutions.

Ferchat envisions the network as a catalyst for economic growth and an opportunity to connect Canadians that live in remote areas. Australia, which has a vast geographic area, has deployed something similar and Alberta began something called the SuperNet project several years back.

The group proposes that the infrastructure be funded in part with Nortel’s research and development tax credits.

“Japan has incredible program of taking gigabits of data to the home so that would mean you could deliver CATV and a whole bag of tricks,” Ferchat said. “I don’t know whether Canada has an appetite for that, but clearly we were No. 1 in terms of a broadband network access and now we’re either 25 or 35 depending on which survey you look at.”

Nortel is estimated to have amassed hundreds of millions of dollars in tax credits by spending about $2 billion annually in R&D over the years.

But under Canadian laws, this credit can only be accessed if the company is profitable.

“If Nortel is sold off to foreign interests, these credits disappear,” said Craig.

It would also hurt current customers, Ferchat said, using software support as an analogy.

“At some stage you need to consult Microsoft,” he said. “Suppose Microsoft was split up into four pieces, which is what they’re planning to do with Nortel, and shipped around the world, where would you go? That’s the issue. Our customer are deserving of better that that.”

Nortel lost US$5.8 billion last year, and filed for protection from creditors when faced with dropping revenues and deadlines to make interest payments.

The company, which was spun off from Bell Canada Enterprises Inc. in 2000, made profits between 1994 and 1997, according to annual reports posted on the company’s Web site. Since then, it has lost money every year except 2006, when it had net earnings of $28 million on revenues of $11.4 billion. All figures are in U.S. currency.

In June, 1998, Nortel acquired Bay Networks for $9.1 billion, which added enterprise data products to Nortel’s offerings, which were primarily in the carrier space. At the time, Nortel had about 73,000 workers and the Bay acquisition brought its total head count to 80,000. In 1998 the company lost $537 million on revenues of $17.6 billion.

At the beginning of 2001, the company had more than 94,000 employees, according to its annual report for that year.

In 1999, revenue grew to $22 billion, but the company announced plans to close down eight plants and outsource operations. Included in the cuts were plants in Calgary, Burnaby, B.C. and the eastern Ontario cities of Belleville and Cornwall.

That same year, then-CEO John Roth made waves when he blamed what he called a “punitive” taxation policy for high-tech workers leaving Canada. He did say at the company’s 1999 shareholders meeting it would continue to be based in Canada.

In January, 2000 Nortel paid US$3 billion for Qtera Corp. of Boca Raton, Fla., which at the time was beta testing a 10 Gigabit per second optical networking product. Nortel wanted Qtera’s technology because it could transport traffic more than 4,000 at 10 Gbps without using add-drop multiplexers to convert the signals from optical to electrical, then back to optical again.

Nortel would go on to buy 10 other companies in 2000, including Alteon WebSystems Inc., which makes application acceleration products, for US$7 billion. Other acquisitions that year include Clarify (for US$4 billion), Xros (for US$3 billion) and tunable photonics vendor CoreTek Inc. for US$1.3 billion.

Other acquisitions in 2000 included Promatory, Architel, Epicon and Sonoma. Last February, Tel Aviv-based Radware agreed to buy the products acquired from Alteon.

During the summer of 2000, Nortel’s shares dominated the Toronto Stock Exchange 300 index. Its shares had been trading at $58 in January, 1996 and over the next four and a half years, split three times and would have closed at $984 on July 26, 2000. Because they split three times, they closed at $123, and in intraday trading nearly hit $125 twice during that summer.

Eventually the share price dropped to $2.50 before consolidating in December, 2006, such that ten shares were combined into one share.

From September, 2000 until September, 2001 the share price dropped from $122 to $7.80. The following month, the company was down to 60,000 employees, at which point Frank Dunn replaced John Roth as CEO and the company announced an additional 10,000 job cuts. Between April and June, 2001 the company wrote down more than US$12.4 billion in intangible assets, primarily related to the acquisitions of Alteon, Xros and Qtera. This contributed to the company’s loss of $27.3 billion in 2001, its worst year ever.

Dunn was fired in April, 2004 and a year ago was charged by the Royal Canadian Mounted Police with two counts of fraud affecting public market, two counts of falsification of books and documents and three counts of false prospectus, under section 400 (1) of the Criminal Code of Canada.

At press time a Nortel share cost 79 cents. Had it not consolidated, it would be worth eight cents today, meaning Nortel has lost more than 99.99 per cent of its market value since it closed at $123.10 on July 26, 2000.