Wednesday, January 14, 2009 1 comments ++[ CLICK TO COMMENT ]++

Nortel files for bankruptcy

The skeleton in Canadians' closet has been finally put down. The Globe & Mail reports that Nortel has announced that it will file for bankruptcy protection. The news isn't too surprising and the stock market has benn pricing in a potential bankruptcy ever since rumours started last year.

Nortel, based in Toronto, said it has applied for creditor protection under the Companies' Creditors Arrangement Act (CCAA) in Canada. A hearing by the Ontario Superior Court of Justice is scheduled for Wednesday afternoon.

The company's U.S. operations have also filed for protection under Chapter 11 of the U.S. Bankruptcy Code and its European units will make similar filings in Europe, the company said.


Opting for creditor protection marks an incredible fall from grace for a telecom manufacturer that is almost as old as the telephone. Nortel easily qualified as the country's largest company at the peak of the tech boom in 2000, with a $366-billion (Canadian) market capitalization and 95,000 employees.

While still North America's largest telecom equipment maker, Nortel's shares were worth a total of just $192-million on Tuesday, and the company has 26,000 staff after a bruising series of layoffs over the past eight years. Nortel stock that soared to $1,231 at the peak of the tech bubble – reflecting a recent consolidation in shares – closed Tuesday at 38.5 cents on the Toronto Stock Exchange.

Nortel was the poster boy for the dot-com bubble in Canada--think modern day Potash Corporation--and had the largest market cap on the TSX in the late 90's by a wide margin. As the quoted article points out, Nortel had a market cap of C$366 billion (probably around $250+ billion in US$) at the peak--that's similar to the companies with the highest market capitalization right now, such as ExxonMobil, P&G and Microsoft. It should be noted that the indexing methodology was flawed back then but this has been fixed after the TSX started using S&P to constitute its indexes. The huge market cap essentially meant that every passive investor from Canada was heavily invested in Nortel in the late 90's.

Nortel's business and history resembles that of Lucent, another giant, this one from America, that has fallen off a cliff, and was a pioneer in telecommunications.
Similiar to how Lucent was spun off from AT&T, Nortel was spun off from BCE. These telecom equipment manufacturers couldn't adapt well to the new wireless technologies that were emerging in the last decade. On top of wid overvaluation, Nortel also went through a few accounting scandals while the executives who manipulated the books either never got charged or got off easily (Canada's white collar crime punishment is very lax.)

Although it was inevitable, the bankruptcy of Nortel will hurt research and development in Canada, particularly the Ottawa area. It used to be the largest recruiter of science and engineering graduates at one point, and I believe it is still the largest R&D spender in Canada (have to double-check this.)

This is a great example of the Buffett dictum that when good management meets bad business, it's the latter that takes precedence. Mike Zafirovski came onboard from Motorola with great fanfare, after he turned around Motorola's handset division. Yet he was unable to prevent the sinking ship known as Nortel.


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