INSEAD MBA Project. NORTEL BU Analysis

1. The
Rise
and
fall
of
a
giant
…
or
how
to
destroy
400
Billion
Dollars
in
9
Years…
The
GEMBA
2009
Project
Morten
Gavlen
Javier
Gonzalez
.....................................................................................................................
Frederik
Nilner
1

2. 1.
EXECUTIVE
SUMMARY ........................................................................................................ 4
2.
INTRODUCTION ................................................................................................................... 5
3.
NORTEL
–
General
Recent
History ....................................................................................... 6
Internet
Bubble ...................................................................................................................... 6
Accounting
Troubles ............................................................................................................... 6
Structure ................................................................................................................................. 7
The
last
few
Years
before
the
filing ........................................................................................ 7
4.
Bankruptcy
Filing ................................................................................................................. 8
Chapter
11,
a
description ....................................................................................................... 8
Chapter
7
–
Liquidation ................................................................................................. 8
Chapter
11
–
Business
reorganization .......................................................................... 8
Chapter
13
–
Individual
reorganization ........................................................................ 9
After
the
filing ........................................................................................................................ 9
Management .......................................................................................................................... 9
5.
Background
on
Nortel
competition ................................................................................... 11
Ciena ..................................................................................................................................... 11
Cisco
Systems ....................................................................................................................... 11
Ericsson ................................................................................................................................. 11
Alcatel
Lucent ....................................................................................................................... 12
Nokia
Siemens
Networks ..................................................................................................... 12
Huawei .................................................................................................................................. 12
6.
Analyzing
Financial
Data .................................................................................................... 13
Method ................................................................................................................................. 13
ROIC ...................................................................................................................................... 13
Return
on
sales ..................................................................................................................... 13
Cost
of
goods
sold ................................................................................................................ 13
Selling,
General
and
Administrative
Expenses ..................................................................... 14
Capital
Turnover ................................................................................................................... 14
Fixed
Assets .......................................................................................................................... 14
Intangible
Assets .................................................................................................................. 14
Cash
position ........................................................................................................................ 15
Working
Capital .................................................................................................................... 15
7.
Analyzing
Management
at
Nortel ..................................................................................... 16
Unclear
strategy
+
failed
execution
=
Bad
Management ..................................................... 16
8.
Nortel
Bankruptcy
–
Possible
future
developments ......................................................... 19
Breaking
up
the
family
jewels
into
Business
Units ............................................................... 19
9.
What’s
left
of
Nortel
–
what
might
happen? .................................................................... 20
Enterprise
Solutions .................................................................................................... 20
Carrier
Networks ......................................................................................................... 20
Metropolitan
Ethernet
Networks
(MEN) .................................................................... 20
10.
Which
companies
will
be
interested
in
Nortel’s
MEN
?
Why
? ...................................... 23
CISCO .................................................................................................................................... 23
ALCATEL
LUCENT .................................................................................................................. 23
ERICSSON .............................................................................................................................. 23
HUAWEI ................................................................................................................................ 23
TELLABS ................................................................................................................................ 24
INFINERA .............................................................................................................................. 24
2

3. NSN ....................................................................................................................................... 24
CIENA .................................................................................................................................... 24
11.
Conclusions ...................................................................................................................... 27
12.
Appendices ...................................................................................................................... 28
Absolute
Company
Assets
over
Time
(Million
Dollars) ........................................................ 34
Absolute
Turnover
over
Time
(Million
Dollars) .................................................................... 34
3

4. 4
1. EXECUTIVE
SUMMARY
The
telecom
industry
has
experienced
a
series
of
technological
and
market
specific
changes
over
the
last
decades.
Inventions
like
internet,
GSM,
UMTS,
3G
and
soon
to
come
4G
are
all
pushing
the
industry
sector
towards
new
and
unproven
ground
where
the
only
certainty
is
that
the
demand
will
be
there.
The
market
itself
developed
on
other
levels
as
well,
deregulation
of
the
telecom
market,
and
the
opening
up
of
the
monopolistically
driven
telephone
networks
have
allowed
new
actors
onto
the
scenes
that
in
the
midst
of
the
20th
century
were
considered
as
closed.
Nortel,
once
one
of
the
giants,
at
the
turn
of
the
century
retained
30%
of
the
Toronto’s
stock
market
value,
only
to
find
itself
today,
9
years
later,
in
Chapter
11
with
the
intention
to
sell
of
all
assets
to
the
highest
bidder.
Having
seen
this
100
plus
years
old
company
survive
through
several
different
phases
of
technology
and
market,
this
paper
aims
to
look
behind
the
scenes
to
find
out
how
it
was
possible
for
such
a
major
actor
to
suddenly
go
belly
up.
Financial
studies
shows
a
company
striving
to
cut
costs
as
of
2000,
but
unable
to
recover
lost
turnover.
The
introduction
of
the
next
generation
mobile
communication
technology
4G
also
did
not
come
early
enough,
preventing
necessary
turnover
compensation.
Early
dismembering
of
the
lucrative
UMTS
business
to
Alcatel
Lucent
also
removed
the
bread
and
butter
basis
for
a
stable
switch
over
into
new
technologies.
Managerial
aspects
to
the
fall
of
the
Canadian
giant
seem
to
have
been
many.
Over
belief
in
key
performance
indicators
and
incentive
programs
not
assuring
long
time
growth
forced
Nortel
into
situations
counter
productive
to
the
necessary
stable
growth
and
technology
adaptation.
The
mere
fact
that
4
CEOs
had
a
go
at
the
first
8
years
of
the
21st
century
does
indicate
the
instability
at
hand.
Several
corruption
and
accounting
scandals
rattled
Nortel
as
well
at
the
break
of
the
new
century,
and
the
markets
never
regained
belief
in
management.
Historically,
Nortel
was
a
hard
core
technology
production
company,
over
time
moving
towards
a
high
tech
internet
service
provider
entity
with
mind
breaking
developments
in
several
areas.
This
evolution
was
not
mirrored
in
the
culture
of
the
company,
where
engineering
skills
and
values
remained
in
power
in
spite
of
the
evolution
of
the
company
towards
service.
At
the
end,
Ericsson,
Avaya,
Alcatel
Lucent
and
recently
Ciena
divided
the
company
between
them,
and
the
rests
of
Nortel
are
more
present
in
libraries
than
on
any
market.
This
paper
will
give
you
insights
and
show
you
the
details
behind
the
drastic
demise
of
one
of
Canada’s
and
the
worlds
most
impressive
value
destructive
adventures.

5. 5
2. INTRODUCTION
It
is
a
part
of
evolution,
companies
come
and
companies
go.
Through
thoroughly
complicated
mechanisms,
mergers,
joint
ventures,
acquisitions
and
semi
Darwinist
behaviors,
new
and
temporarily
stronger
units
are
created,
only
to
face
the
same
processes
over
and
over
again.
Looking
back
over
the
last
hundred
years
or
so,
a
non
negligible
number
of
great
companies
have
seen
this
happen
to
them,
and
the
world
keeps
turning
after
their
disappearance
as
it
did
before.
Actually,
the
relative
number
of
companies
that
survive
the
100
year
mark
with
the
same
basic
legal
structure
is
very
low,
and
if
we
look
at
companies
once
publicly
listed,
the
number
drops
even
further.
The
owner
structures,
hierarchies
and
investments
are
directed
and
named
differently
in
the
legal
framework
that
our
current
society
is
governed
by,
all
as
a
part
of
the
eternal
battle
for
market,
supplier
or
customer
power,
followed
by
a
not
always
logical
mixture
of
individual
demand
for
glory
and
fame.
What
if
we
look
at
one
of
the
companies
going
through
a
very
strong
change,
maybe
even
risking
its
mere
existence?
What
has
been
going
on
in
the
company
over
the
last
years
(maybe
evidence
is
hidden
even
further
back,
but
we
shall
limit
ourselves
to
the
last
few
decades)?
By
doing
this,
possibly
we
can
gain
financial
and
managerial
insights
to
be
used
in
future
situations
where
the
right
managerial
call
has
to
be
made.
The
Canadian
telecommunications
company
Nortel,
or
more
specifically
Nortel
Networks
Cooperation,
is
an
example
we
have
chosen
to
follow
through
the
hardship
of
the
end
other
the
20th
and
the
beginning
of
the
21st
century,
to
the
finally
end
up
in
Chapter
11
and
under
Canadian
Creditors
protection
act.
What
actually
went
on
financially?
Where
there
managerial
issues?
Was
technology
itself
a
factor?
Or,
what
about
the
markets,
how
did
they
behave
in
this
time
period?
All
of
these
questions
may
not
be
answered;
some
may
lead
us
to
insights.
Only
by
diving
deep
into
the
remains
to
be
found
in
literature,
across
internet
and
economic
journals
can
we
get
in
under
the
surface
and
try
to
express
what
actually
went
on.
Let
the
journey
begin…
Society
and
telecommunication
The
Telecommunication
Industry
and
all
activities
associated
with
it
has
taken
an
important
position
in
the
word
economy.
In
2006
the
official
estimates
claim
3%
of
the
gross
world
product
(GDP),
or
somewhere
around
USD
1.2
Trillion
where
allocated
to
this
industry.1
Macro
economically
speaking,
a
link
between
the
development
of
the
telecom
sector
in
a
country
and
its
economic
growth
is
generally
considered
as
valid.
Socially
the
behavioral
patterns
of
the
new
generations
are
strongly
influenced
by
the
new
information
era,
with
SMS
and
social
networking
sites
as
two
examples
of
second
degree
implications
of
the
telecom
development.
New
legislative
organs
and
debates
on
international
levels
have
been
born
alongside
the
technological
evolution
and
of
course
the
military
impacts
are
evident.
1
«
Telecom
Industry
to
reach
1.2
Trillion
in
2006
»,
VoIP
Magazine,
2005

6. 6
3. NORTEL
–
General
Recent
History
Nortel,
the
name
stemming
from
the
early
Northern
Electric
and
Manufacturing
Company
Limited
founded
in
1895
as
the
American
telecom
pioneer
BELL
decided
to
created
a
stand
alone
entity
for
production
aimed
for
the
Canadian
market,
is
since
1999
officially
Nortel
Networks
Cooperation.
In
many
ways
this
Toronto
based
technology
enterprise
represents
for
years
the
Canadian
capacity
to
outperform
the
US
neighbors.
During
certain
phases
of
its
last
10
years
of
existence,
Nortel
was
the
absolute
dominant
as
an
employer
and
as
actor
on
the
local
Canadian
stock
market.
In
many
ways
the
local
social
and
political
interests
are
intertwined
with
the
development
of
the
company,
and
now
at
the
verge
of
its
breakdown,
protectionist
behaviors
surface
in
order
to
desperately
protect
what
is
left,
often
without
any
substance
behind.
The
Canadian
quasi
giant,
standing
semi
strong
with
still
30
000
employees
and
an
$11
Billion
turnover
in
2007
is,
or
was,
one
of
the
major
actors
on
the
world
telecom
markets.
The
main
competitors,
across
business
units
are
well
known
actors
such
as
Cisco
Systems,
Ericsson,
Alcatel
Lucent,
Nokia
Siemens
Networks,
Motorola,
Huawei
and
NEC.
Internet
Bubble
When
Nortel
market
capitalization
was
at
its
top,
it
represented
more
than
a
third
of
the
Toronto
Stock
Exchange
value.
As
the
bubble
of
the
internet
era
burst,
Nortel
stock
price
fell
from
C$124
to
C$0.47,
reducing
the
market
capitalization
value
from
C$398
Billion
in
September
2000
to
less
than
C$5
Billion
in
August
2002.
It
was
much
debated
at
the
time
that
the
CEO
John
Roth
had
sold
stock
options
just
before
the
fall
in
2000
for
over
C$135
Million
alone.
Accounting
Troubles
In
the
early
21st
century,
Nortel
was
the
scene
for
an
accounting
scandal
that
would
leave
traces
for
years
to
come.2
The
Internet
Bubble
had
left
the
company
bleeding,
and
a
new
top
management
was
appointed
with
CFO
Frank
Dunn
taking
over
as
CEO
after
John
Roth
who
retired
under
controversy.
Frank
Dunn
then
managed
a
major
restructuring
project
reducing
the
workforce
by
two
thirds
(eliminating
some
60
000
jobs)
and
then
finally
reaching
positive
results
in
the
beginning
of
2003.
Apparently
these
numbers
were
based
on
some
very
creative
bookkeeping
by
Dunn,
his
CFO
Beatty
and
a
controller
by
the
name
of
Gollogly.
The
audit
that
followed
reworked
the
balance
sheets
for
2001,
2002
and
2003
repositioning
some
$900
Million
of
liabilities,
and
large
amounts
of
revenues
being
incorrectly
booked
in
the
late
20th
century.
The
results
of
this
mismanagement
were
many,
bonuses
were
repaid
by
managers,
Dunn,
Beatty
and
Gollogly
were
fired
and
the
brand
Nortel
was
heavily
damaged
through
the
association
with
corruption
and
an
accounting
scandal.
2 « Nortel », en.wikipedia.org/wiki/Nortel, 17.11.2009

7. 7
Structure
Around
2007,
the
company
presented
itself
with
4
major
business
units
• Enterprise
solutions,
2007:
$2620
Million
turnover,
23.9%
of
total.
Enterprise
networking
solutions
for
internet,
VoIP,
security,
multimedia
messaging,
call
centers
and
several
integrated
software
applications
on
the
workstations
of
the
enterprise
clients.
These
clients
range
from
small
companies
to
large
multinationals.
The
business
segment
was
still
enjoying
strong
growth
at
the
end
of
2007.
Collaboration
with
Microsoft
and
IBM
open
up
for
further
business
development.
• Carrier
Networks,
2007:
$4493
Million
turnover,
41%
of
total.
Mobility
Network
Solutions,
Carrier
Networking
solutions
and
specifically
solutions
for
mobile
applications.
Complete
systems
for
GSM,
GPRS
and
EDGE
for
customers
like
France
Telecom
and
T-­‐
Mobile
in
the
US.
• Metropolitan
Ethernet
Networks,
MEN,
2007:
$1525
Million
turnover,
13.9%
of
total
A
combined
IP
networks
&
optical
technology
for
carrier
and
enterprise
solutions.
• Global
Services
2007:
$2087
Million
turnover,
19%
of
total.
The
separate
service
unit
proposing
service
in
four
main
areas:
Network
support,
network
management,
network
implementation
and
network
applications.
• Nortel
Government
Solutions
This
entity
is
a
separate
company,
and
manages
contracts
and
contacts
with
public
institutions
in
the
US
and
around
the
world.
The
last
few
Years
before
the
filing
In
no
way
did
the
following
managements
rest
prudent
over
the
time
to
follow.
The
last
years
leading
up
to
January
14th
2009
were
filled
with
active
managerial
decisions
like3
• April
2005,
PEC
Acquired,
an
IT
service
company
with
1700
employees.
• December
2005,
acquisition
of
Taman
Networks
to
gain
insights
and
market
knowledge
on
high
performance
WAN
IP.
• December
2006,
divestiture
of
the
radio
based
UMTS
activity;
all
assets
sold
to
Alcatel-­‐
Lucent.
3 « Nortel », fr.wikipedia.org/wiki/Nortel, 24.09.2009

8. 8
4. Bankruptcy
Filing
On
January
14th
2009
Nortel
Network
Inc
and
14
of
its
subsidiaries
filed
petitions
for
bankruptcy
in
the
United
States
Bankruptcy
Court
for
the
District
of
Delaware
seeking
relief
under
chapter
11
of
the
US
Bankruptcy
Code.
At
the
same
time,
similar
filings
were
made
in
Canada,
Israel
and
the
UK.
Already
in
December
2008
Moody’s
rating
had
gone
down
to
Caa-­‐2
signaling
a
risk
for
bankruptcy.
Chapter
11,
a
description
In
order
to
understand
what
happened
to
Nortel
on
the
14
of
January,
A
brief
description
of
the
Chapter
11
proceedings
and
regulations.4
In
general
the
American
Chapter
11
is
considered
very
lenient
on
management,
often
seen
as
guilty
in
creating
the
situation
forcing
the
company
to
call
for
support
.
The
European
counterparts
are
much
stricter
to
the
post
bankruptcy
management.
There
are
3
main
chapters
in
the
United
States
Bankruptcy
Code,
regularizing
bankruptcy
cases.
This
picture
describes
the
complexity
schematically.5
Chapter
7
–
Liquidation
Deals
with
the
liquidation
of
a
bankruptcy,
i.e.
companies
in
very
large
debt
situations
can
immediately
be
liquidated
and
the
assets
sold
to
reimburse
the
creditors
in
order
of
priority.
Also
individuals
can
be
concerned
by
this.
Chapter
11
–
Business
reorganization
If
a
business
is
unable
to
pay
its
creditors,
they
or
the
business
can
seek
protection
under
Chapter
11.
This
normally
implies
that
the
business
continues
under
the
control
of
the
debtor,
but
that
it
is
subject
to
oversight
and
jurisdiction
of
the
court.
The
Chapter
11
allows
the
debtor
in
possession
several
means
to
restructure
the
business.
A
debtor
can
organize
new
loans
under
favourable
terms,
with
the
new
creditors
being
prioritized
on
repayments.
Contracts
can
be
cancelled
and
or
rejected,
litigation
is
not
possible
due
to
a
state
of
“Automatic
Stay”
where
any
litigation
initiatives
are
held
until
liquidation
or
the
company
emerges
from
Chapter
11.
4
«
Chapter
11
»,
en.wikipedia.org/wiki/Chapter_11
5
www.bancruptyvisulas.com,
18.11.2009

9. Any
Chapter
11
filing
will
be
follow
by
a
bankruptcy
plan.
This
plan
is
proposed
by
any
party
interested
in
the
case,
and
agreed
upon
with
all
the
creditors.
If
no
agreement
can
be
found,
either
the
company
passes
to
Chapter
7
–
Liquidation
or
the
activity
returns
to
a
status
quo
before
the
filing
allowing
for
individual
direct
“classical”
legal
measures
to
be
taken.
A
Chapter
11
subject
can
pass
to
Chapter
7
–
Liquidation
if
this
is
in
the
interest
of
all
creditors,
or
the
company
in
question
can
be
liquidated
under
Chapter
11
with
the
current
management
if
this
is
deemed
the
best
solution.
During
the
reorganization,
the
creditors
are
reimbursed
according
to
a
priority
list
defined
by
law.
Secured
debts
(with
i.e.
collateral
or
security
interest)
will
be
paid
first,
and
the
employees
and
suppliers
before
any
unsecured
credits
are
addressed.
The
prior
level
of
priority
must
be
completely
cleared
before
proceeding
to
the
next
one.
9
Chapter
13
–
Individual
reorganization
As
chapter
11,
chapter
13
defines
a
plan
for
the
concerned
party
(an
individual)
to
refinance
its
debt
over
time.
This
is
in
contrast
to
Chapter
7
that
offers
immediate
relief.
After
the
filing
Although
the
initial
intention
of
Nortel
CEO
M
Zafirovski
seems
to
have
been
to
re-­‐stabilize
the
company
and
renegotiate
the
debt
through
a
Chapter
11
procedure,
the
final
effects
of
the
crises
were
stronger
then
what
he
had
expected.
Thus,
the
events
that
followed
show
the
new
chosen
direction,
to
move
towards
a
refinancing
by
auctioning
away
the
divisions
one
by
one.
On
the
25
of
February
2009,
Nortel
announced
the
disengagement
of
3200
persons,
or
approximately
10%
of
the
remaining
workforce.
In
July
2009
Nortel
sells
its
Enterprise
Solutions
business
to
Avaya
for
$475
Million.
Also
in
July,
Ericsson
acquires
the
Carrier
Networks
division
from
Nortel
for
an
estimated
USD
$1,130
Million.
This
in
spite
of
some
heavy
political
movements
against
a
sell
of
an
industry
of
this
size
to
a
foreign
entity.
Management
President
and
CEO
Mike
Zafirovski,
earlier
at
GE
and
Motorola,
member
of
the
board
at
Motorola
and
Boeing6,
joined
the
company
in
2005,
well
aware
of
the
company’s
actual
situation.
As
a
practicing
Ironman
triathlete
he
was
used
to
long
and
hard
challenges,
possibly
this
one
was
the
first
one
he
failed.7
After
four
years
of
active
restructuring
and
planning
for
the
future
in
the
aftermath
of
the
internet
bubble
that
plunged
Nortel
from
$30
to
$11
Billion
turnover
in
only
a
few
years,
the
crisis
in
2008
might
simply
have
been
too
much
for
the
Canadian
telecom
operator.
6
«
Nortel
Networks
Group
»,
BusinessWeek,
,
17.11.09
7
«
Nortel’s
Road
to
Bankruptcy
»,
BusinessWeek,
15.01.09

10. 10
At
his
side,
Mr.
Zafirovski
had
amongst
others
8
John
Roese,
CTO,
2
years
and
seven
months
at
Nortel,
history
of
several
different
CTO
positions
Richard
Lowe,
President
Carrier
Networks,
history
of
29
years
at
Nortel
Joel
Hackney,
President
Enterprise
Solutions,
Nortel
from
2005
–
history
at
GE
as
GM
for
GE
Industrial
Philippe
Morin,
President
of
Metro
Ethernet
Networks,
history
of
19
years
at
Nortel
Dietmar
Wendt,
President
Global
Services,
history
at
IBM
Chuck
Saffell
Jr,
CEO
Nortel
Government
Solutions,
career
history
in
governmental
organizations
M.
Zafirovski
eventually
resigned
on
August
10,
2009
on
his
own
initiative.
That
he
is
now
filing
claims
for
a
retroactive
severance
package
(USD
12
Million)
has
set
off
major
reactions
within
the
Nortel
and
ex
Nortel
employee
community.
Other
top
executives
received
major
retention
packages
after
the
filing
of
January
14th
as
the
hope
was
initially
to
re-­‐emerge
after
the
filing,
even
though
any
severance
pays
to
employees
after
that
date
had
been
frozen,
as
compensations
funds
are
considered
general
assets
of
the
company
and
subject
to
claim
for
all
creditors.
8
«
Nortel
Networks
Group
»,
BusinessWeek,
,
17.11.09

11. 11
5. Background
on
Nortel
competition
The
number
of
actors
on
the
telecom
market
is
hard
to
define.
Below
is
a
brief
description
of
a
couple
of
the
competitor
that
Nortel
faces
in
the
optical
switching
and
optical
transport
segments.
Ciena
2008:
2203
Employees,
USD
Revenue
0.9
Billion.
Despite
its
relative
small
size
compared
to
the
other
actors
listed
here,
Ciena
has
a
leadership
position
in
the
optical
transport
and
switching
market
Ciena’s
bid
for
the
MEN
business
as
a
stalking
horse9,
[a
term
describing
the
first
bidder
and
the
special
terms
that
follow
from
negotiation
on
that
specific
role]
gives
them
a
favorable
position
to
move
forwards
into
the
bidding
phase.
Cisco
Systems
2008:
>
65
000
Employees,
USD
Revenue
36.1
Billion.
Cisco
Systems
is
a
California
based
telecom
company,
founded
in
1984
by
a
married
couple
studying
at
Stanford
University10.
In
the
internet
boom
of
1999
the
company
was
the
single
most
valued
company
in
the
World
with
a
market
capitalization
value
above
USD
500
Million.
Still
in
June
2009,
the
company
has
a
market
capitalization
value
of
above
USD
100
Billion,
allowing
for
a
position
in
the
DOW
Jones
index
as
General
Motors
was
delisted
from
the
index
as
it
applied
for
protection
under
Chapter
11.
Ericsson
2008:
78
740
Employees,
SEK
Revenue
208
Billion.
[USD
29
Billion]
Ericsson,
or
Telefonaktiebolaget
L.
M.
Ericsson,
is
a
Swedish
company
based
in
Kista
outside
Stockholm
founded
in
1876
by
Lars
Magnus
Ericsson.
Ericsson
has
in
the
21st
century
been
focusing
further
and
further
on
back
end
technology
solutions
to
support
internet
and
communications.
The
creation
of
Sony-­‐Ericsson
in
2001
emphasized
this
strategic
move
away
from
B2C
industry.
The
business
unit
Carrier
Networks
was
acquired
from
Nortel
after
the
bankruptcy.
9
«
The
Stalking
Horse
»,
www.jonesday.com
10
«
Cisco
Systems
»,
en.wikipedia.org/wiki/Cisco_Systems

12. 12
Alcatel
Lucent
2008:
77
717
Employees,
EUR
Revenue
16,9
Billion.
[USD
25.4
Billion]
Alcatel
Lucent
is
a
France
Telecom
Company
based
in
Paris,
France.
Late
2006
the
UMTS
Business
of
Nortel
was
acquired
by
Alcatel
Lucent.
The
Ex
CEO
of
Alcatel
Lucent,
Mrs.
Patricia
Russo,
is
a
non
executive
member
of
the
board
at
Avaya
Inc,
the
company
who
later
bought
the
Nortel
Business
Unit
Enterprise
Solutions.
Nokia
Siemens
Networks
2008:
60
000
Employees,
EUR
revenue
15,3
Billion
[USD
22.7
Billion]
Created
in
2006,
the
Siemens
AG
COM
Business
Unit
(with
certain
exceptions)
and
the
Nokia
Network
Business
Group
merged
into
a
new
company
on
June
19,
2006.
Headquartered
in
Espoo,
Finland.
Huawei
2008:
87
502
Employees,
USD
Revenue
23.3
Billion
Huawei
is
the
main
Chinese
actor
on
the
global
telecom
market.
Based
in
Shenzhen
in
the
Guangdong,
it
was
established
in
1988
and
is
still
today
privately
held.
In
December
2008,
BusinessWeek
magazine
puts
Huawei
in
third
position
after
Google
and
Apple
as
the
world’s
most
Influential
companies.

13. 6. Analyzing
Financial
Data
Method
The
DuPont
Analysis
simply
breaks
down
the
results
(Return
on
Invested
Capital)
of
a
company
into
subparts
that
allow
for
intra
industry
comparisons.
The
model
is
not
applicable
in
all
company
comparisons,
but
for
classical
structures
with
production,
sales
and
product
development,
the
tool
provides
insights
otherwise
difficult
to
realize.
All
analysis
for
the
results
below
can
be
found
in
graphical
form
at
the
end
of
this
paper.
13
ROIC
The
ROIC
gives
us
a
measure
for
how
efficiently
a
company
is
allocating
its
capital.
It
is
usually
expressed
as
a
ration
between
NOPAT
(Net
operating
profit
after
tax)
/
Total
capital
invested.
For
a
company
to
allocate
its
capital
efficiently
ROIC
needs
to
be
higher
than
the
company’s
WACC.
As
we
can
see
from
the
bar
charts
showing
ROIC
there
is
only
two
out
of
five
companies
that
even
manage
to
have
a
positive
ROIC
over
the
last
four
years.
Even
without
information
on
the
companies’
WACC,
we
can
clearly
state
that
the
three
companies
with
a
negative
ROIC
are
destroying
value.
With
so
many
of
the
major
players
in
the
industry
destroying
value,
it
could
be
a
sign
that
there
is
overcapacity
in
the
industry
and
that
some
of
the
players
need
to
exit.
From
the
ROIC
figures
of
the
last
four
years
Nortel
we
can
see
that
Nortel
is
the
weakest
of
the
major
players.
Adding
the
knowledge
of
accounting
scandals
earlier
in
the
decade,
it
is
surprising
that
Nortel
has
been
able
to
continue
for
as
long
as
it
has
as
an
independent
actor.
Economic
profit
as
measured
by
Invested
Capital
(ROIC
–
WACC)
gives
us
an
indicator
of
how
much
value
is
actually
being
destroyed
by
these
companies.
Return
on
sales
Return
on
sales
is
considered
as
the
operational
profit
margin.
It
measures
a
company’s
operational
efficiency,
and
is
expressed
as
a
ratio
between
EBIT/Revenue.
Once
again
we
see
that
there
are
two
companies,
Ericsson
and
Cisco,
that
stick
out
and
are
the
only
ones
delivering
healthy
margins.
The
ratio
charts
also
show
a
clear
trend
towards
increased
pressures
on
margins
through
the
years
2005
to
2008.
Interestingly
enough
Nortel
shows
an
opposite
trend
until
disaster
hits
in
2008.
This
might
have
been
interpreted
as
a
turnaround
operation
but
is
more
likely
to
have
been
more
accounting
magic
and
an
effort
to
meet
margin
targets
at
all
costs.
Incidentally,
some
of
the
same
behavior
is
observed
in
Ciena’s
figures
which
might
be
a
bad
sign
for
the
future.
Cost
of
goods
sold
The
ratio
of
turnover
to
Cost
of
goods
sold
(COGS)
tells
us
how
effective
a
company
is
at
producing
its
good
and
getting
an
adequate
price
in
the
market.
Comparing
all
the
companies
we
see
that
with
the
exception
of
NSN,
which
probably
have
some
post-­‐merger
operational
problems,
Nortel
has
a
consistently
higher
COGS/Revenue
ratio
than
the
others.
This
can
possibly
be
attributed
to
aggressive
pricing
but
is
most
likely
a
result
of
an
over-­‐engineered
product
portfolio.
Nortel
has

14. always
been
a
company
that
focused
on
being
a
technology
leader
and
this
has
most
probably
been
to
the
detriment
of
production
costs.
There
is
a
marked
trend
across
all
companies
that
the
ration
of
COGS
to
the
turnover
is
increasing
over
the
period
studied.
This
is
evidence
of
an
increasingly
tougher
market
place
and
the
companies
are
cutting
prices
in
order
to
retain
volumes.
14
Selling,
General
and
Administrative
Expenses
The
SG&A
ratio
tells
us
how
much
of
the
company’s
revenues
are
spent
on
activities
that
can
be
directly
linked
to
products.
A
large
part
of
these
costs
are
quite
“sticky”
as
it
takes
time
to
downsize
warehouse
capacity
or
to
lay-­‐off
people
if
the
downturn
is
considered
to
be
long-­‐term.
As
such,
it
is
normal
that
we
will
see
certain
increase
in
this
ratio
as
growth
slows,
but
there
is
something
out
of
the
ordinary
going
on
in
Nortel
that
has
an
increase
of
over
20%
in
its
SG&A.
We
can
attribute
this
event
to
the
fact
that
while
Nortel
sold
the
UMTS
business
unit
and
started
to
shed
off
the
rest
of
the
company
units
(starting
with
the
Alteon
unit),
it
still
maintained
an
unhealthy
level
of
unnecessary
support
functions
that
weighed
down
on
its
SG&A.
In
addition,
the
order
of
the
day
during
the
analyzed
period
of
time
was
to
bring
in
orders
and
all
abuses
of
SG&A
to
that
end
were
practically
excused.
Capital
Turnover
The
capital
turnover
tells
us
how
effectively
invested
capital
is
used
to
generate
revenues
and
is
expressed
by
the
ration
Revenues/Invested
Capital.
The
telecom
equipment
industry
is
a
capital
intensive
industry
as
exhibited
by
all
companies
showing
a
Capital
Turnover
of
less
than
1.
The
big
exception
here
is
Ericsson
which
is
managing
their
balance
sheet
far
more
efficiently
than
its
competitors
with
a
capital
turnover
of
nearly
2.
The
data
still
shows
quite
a
bit
of
variation
between
the
companies
but
Nortel
seems
to
be
in
line
with
what
should
be
expected
in
this
industry.
Fixed
Assets
When
analyzing
the
fixed
assets
we
want
to
see
how
efficiently
the
company
uses
its
fixed
assets
to
generate
revenue.
In
this
analysis
the
fixed
asset
category
is
broken
down
into
two
categories.
Property,
Plant
and
Equipment
(PPE)
and
Long
Term
Investments
(LTI).
First
looking
at
PPE
we
see
that
Nortel
has
the
least
efficient
use
of
fixed
assets,
and
Ericsson
has
by
far
the
most
efficient.
Again
we
will
argue
the
point
that
Nortel’s
wish
to
always
be
in
the
forefront
of
technology
development
makes
their
factories
more
expensive
not
only
to
run
but
also
to
build.
The
more
dramatic
development
is
shown
in
the
evolution
of
LTI.
Here
we
see
that
Nortel
almost
stops
its
long
term
investments
from
2006
an
onwards.
This
is
a
clear
sign
that
the
company
is
having
serious
trouble.
However,
this
sharp
decline
in
investments
is
managing
to
keep
the
total
Capital
Turnover
looking
quite
healthy
for
2007.
Intangible
Assets
Intangible
assets
are
defined
as
non-­‐monetary
assets
that
are
not
physical
in
nature.
They
can
be
divided
into
two
primary
sub-­‐categories
–
legal
intangibles
(that
can
be
owned)
and
competitive
intangibles
(not
owned
but
embedded
in
the
organization).
The
two
most
important
sources
of

15. intangible
assets
in
the
telecom
equipment
industry
are
patents
and
goodwill
that
stems
from
acquisitions
where
a
premium
over
book
value
has
been
paid
for
the
acquired
company.
Earlier
in
the
decade
Nortel
had
to
massively
write
down
its
goodwill
after
it
was
discovered
that
it
had
overpaid
some
of
its
acquisition.
As
we
can
see
from
the
charts
the
ratio
of
intangible
assets/expense
ratio
varies
hugely
between
the
companies
and
Nortel
does
not
seem
to
have
inflated
this
asset
class,
still
they
take
a
huge
write-­‐down
in
2008.
The
value
that
is
left
for
intangible
assets
are
mostly
patents
and
will
probably
be
a
significant
part
of
the
value
for
acquirers.
Whether
or
not
all
patents
will
be
sold
as
parts
of
the
divisions
will
be
an
interesting
story
to
follow.
15
Cash
position
The
cash
position
is
a
signal
of
financial
strength
and
liquidity.
A
strong
cash
position
means
that
the
company
has
enough
cash
to
fund
operations
and
sustain
market
downturns.
However,
a
cash
position
that
is
too
strong
can
be
signaling
a
lack
of
new
development
within
the
company.
Two
of
the
companies
in
this
study
seem
to
fall
into
that
category.
Both
Cisco
and
Ciena
hold
so
much
cash
that
investors
should
ask
themselves
if
it
is
not
better
to
put
the
money
in
the
bank
rather
than
invest
in
companies
that
do
not
put
their
money
to
work.
Nortel’s
cash
position
seems
reasonable
in
this
industry.
Working
Capital
Working
Capital
is
an
indicator
of
a
company’s
short
term
financial
health.
Does
its
current
assets
support
its
current
liabilities?
We
see
that
both
Nortel
and
Alcatel
has
negative
working
capital
whereas
the
other
companies
operate
in
a
range
between
0
and
15%
of
revenue.
The
negative
working
capital
of
Nortel
is
probably
a
sign
that
current
liabilities
are
used
to
fund
the
operating
cycle
while
maintaining
its
cash
position.

16. 7. Analyzing
Management
at
Nortel
Unclear
strategy
+
failed
execution
=
Bad
Management
In
spite
of
all
the
court
hearings,
restructuring
negotiations
and
massive
layoffs,
Nortel
Networks
still
had
to
file
for
bankruptcy
at
the
beginning
of
2009.
Along
the
way,
it
dragged
the
millions
of
shareholders
that
held
a
dash
of
hope
for
survival.
Was
this
really
a
surprise
to
the
market?
In
our
view,
the
signs
were
there;
in
big
bold
red
above
and
below
the
line.
Nortel
had
been
in
a
state
of
coma
for
most
of
the
past
five
years
and
any
mention
of
Nortel
in
the
news
was
actually
NOT
good
news.
Nortel
has
been
an
active
participant
of
one
of
the
worst
management
mayhems
of
the
telecommunications
industry
in
recent
history.
Four
(4)
CEOs
in
eight
(8)
years,
a
series
of
massive
layoffs
totaling
65,000
jobs
cut
since
2001
and
several
accounting
scandals
later,
what’s
left
of
Nortel?
It
is
a
fact
that
assets
are
being
passed
on
to
the
highest
bidder.
For
the
thousands
of
employees
who
have
already
lost
their
jobs,
the
many
more
who
certainly
will
and
the
shareholders
whose
funds
have
disappeared
into
thin
air,
Nortel’s
bankruptcy
filing
is
of
no
comfort.
For
most
Canadians,
Nortel
was
more
than
a
Canadian
company
and
never
just
a
mere
investment
stock.
Nortel
stood
for
international
Canadian
success
and
was
a
symbol
of
its
modern
telecommunication
industry.
To
put
it
in
perspective,
the
US
has
Cisco,
Finland
has
Nokia
and
Sweden
has
Ericsson.
Today,
Nortel
is
simply
a
symbol
of
unjustified
investments,
an
example
of
a
financial
roller
coaster
and
the
evidence
of
value
destruction
in
a
company
where
its
management
was
entirely
responsible
of
its
demise.
We
want
to
discuss
here
the
culprit
of
this
mess
as
well
as
the
mistakes
made.
Naturally,
the
simplistic
manner
to
approach
this
will
be
to
blame
it
on
the
overall
industry
consolidation
and
the
fact
that
a
bubble
is
in
burst
mode
in
the
telecommunications
industry
since
2001.
However,
we
look
for
the
brains
of
the
operation
and
more
specifically
for
the
people
responsible.
Nortel’s
downfall
can
be
easily
digested
by
merely
looking
at
the
portrayal
of
its
four
CEOs
since
2000.
Although
Nortel’s
problem
may
have
arguably
commenced
several
years
back,
let’s
start
with
John
Roth,
who
was
named
Canada’s
CEO
of
the
Year
by
a
Bay
Street
panel
in
the
fall
of
2000
right
after
Nortel’s
stock
hit
its
peak
of
$124
a
share.
Of
course,
one
week
after
receiving
the
award,
Roth
delivered
the
first
of
a
series
of
disappointments
during
his
term:
quarterly
earnings
fell
short
of
analysts’
expectations
and
the
stock
sunk
25%
in
a
single
day.
As
the
great
communicator,
Roth
quickly
assured
the
public
that
Nortel’s
growth
will
still
hold
and
that
he
was
forecasting
a
30%
rise
in
sales.
The
joy
did
not
last
long
since
only
sixty
days
after
that,
Roth
cut
that
forecast
in
half
and
announced
a
layoff
to
10,000
people.
The
signs
were
there;
it
looked
like
the
beginning
of
the
end.
Further
signs?
Well,
Roth
will
retire
by
the
end
of
2001
and
will
walk
away
with
approximately
$139
million
in
compensation
and
stock
options.
By
today’s
standards,
an
outrageous
amount
of
money
for
a
failed
company;
in
yesteryear,
a
newsworthy
front
page
article
representing
success.
After
Roth,
Nortel
decided
that
it
was
time
to
put
the
house
in
order
and
wanted
show
the
street
as
well
as
its
shareholders
that
they
could
restore
confidence
and
had
the
intention
to
remain
in
a
particular
business
segment
only
if
they
could
be
either
#1
or
#2.
To
do
that,
Nortel
quickly
named
Frank
Dunn.
Let’s
clarify
that
Dunn
was
Roth’s
CFO
and
was
portrayed
as
the
man
who
will
bring
financial
restraint
to
a
company
that
had
grown
unwieldy.
Dunn
led
the
company
for
2½
years
and
the
stock
fell
by
half
during
his
watch.
Dunn
was
fired
for
cause
in
April
2004
after
surmounting
allegations
that
he
had
helped
orchestrate
a
massive
accounting
fraud
aimed
at
inflating
profits.
Dunn
is
currently
still
prosecuted
in
Canada
and
the
US
and
denies
any
wrongdoing.
Nortel
management
lived,
fed
off
and
was
compensated
on
performance
indicators.
The
company
was
strictly
operated
16

17. by
indicators
without
regard
for
the
overall
value
created
or
destroyed.
In
this
case,
we
know
they
were
value
destroying
indicators
because
they
concentrated
in
the
everyday
operations
rather
than
on
the
life
of
the
company.
By
the
time
the
company
was
turned
to
Mr.
Owen
in
2004,
Nortel’s
mishaps
had
exploded
into
full-­‐
blown
scandals.
The
ex-­‐Navy
admiral
and
former
vice-­‐chairman
of
the
U.S.
Joint
Chiefs
of
Staff
was
brought
in
to
re-­‐establish
trust
and
credibility.
Unfortunately
for
employees,
shareholders
and
the
future
of
Nortel,
the
appointment
achieved
neither.
Owens’
integrity
was
not
in
question;
however,
his
ability
at
running
navy
ships
and
its
personnel
was
not
necessarily
a
leverage
point
to
operate
a
company
of
the
size
and
complexity
of
Nortel.
A
direct
result
of
this
was
the
defection
of
top
executives
and
a
30%
decline
in
the
stock
price
within
a
short
period
of
18
months.
By
this
time,
any
outside
observer
could
have
concluded
that
incompetence
was
the
real
problem
at
Nortel
and
Owens
could
do
nothing
to
change
that
perception.
If
incompetence
was
the
problem,
why
not
then
find
a
top
executive
with
a
proven
record
of
delivering
performance
and
strict
management.
Enter
Mr.
Mike
Zafirovski.
Mike
Zafirovski
was
a
rising
star
at
Motorola
and
was
hired
at
a
great
expense.
Mike’s
arrival
to
Nortel
was
announced
with
bells
and
whistles.
After
all,
Mike
had
a
track
record
at
Motorola
and
had
worked
with
the
best
Six
Sigma
practices
at
GE.
Mike
certainly
knew
how
to
turnaround
a
company
and
was
considered
to
have
great
industry
knowledge.
During
his
tenure,
Nortel
did
become
leaner
but
not
meaner;
Nortel
did
try
to
considerably
lower
its
costs,
we
can
see
this
from
our
analysis.
In
fact,
we
can
consider
that
Nortel
was
an
athlete
preparing
for
a
marathon
by
first
loosing
weight
to
go
faster,
but
eventually
not
concentrating
in
the
essential
muscles
nor
working
on
its
resistance
or
breathing
techniques.
After
Nortel
completed
a
reverse
10-­‐for-­‐1
stock
split
in
2006,
it
announced
the
sale
of
its
UMTS
division
to
Alcatel-­‐Lucent
for
USD
$320
million.
Nortel
sold
off
this
unit
on
a
straight
cash
agreement;
1,700
Nortel
employees
transferred
to
Alcatel,
mostly
engineers
based
in
France,
Canada
and
China.
Nortel's
reverse
stock
split
reduced
the
number
of
shares
from
more
than
4
billion
and
drove
the
share
price
up
to
$21.15
at
the
close
of
trading.
Since
Mike
joined
Nortel
in
2005,
he
implemented
strict
cost-­‐savings
measures,
hired
a
solid
management
team
and
tightened
the
firm's
product
focus
calling
with
a
cost-­‐savings
target
of
USD
$1.5
billion
per
year
by
2008.
Zafirovski’s
goal
was
to
reduce
Nortel's
involvement
in
product
areas
and
focus
on
markets
where
its
strategy
could
achieve
a
dominant
position.
The
areas
of
focus
gravitated
along
the
lines
of
WiMax
(wireless
broadband
delivery)
and
emerging
4G
wireless
networks.
Nortel
strived
to
increase
resources
dedicated
to
strategic
business,
but
the
sale
of
the
UMTS
unit
was
perceived
as
a
mistake
and
a
strategic
blunder.
The
reason
is
that
in
Nortel’s
intent
to
emphasis
4G
development
to
deliver
high-­‐speed
broadband
services
to
mobile
users
and
its
focus
on
the
underpinning
elements
of
mobile
video
and
multimedia
revolution
in
mobile
operators,
it
had
to
still
continue
to
deliver
superior
value
to
GSM,
CDMA
and
UMTS
customers
because
these
customers
will
be
the
basis
for
their
intended
growth
in
4G
networks.
It
appears
that
the
costs
actually
shifted
from
further
workforce
reductions
onto
future
development
projects
that
never
did
actually
see
the
light
of
day.
One
such
project
would
have
positioned
Nortel
in
the
subscriber
broadband
management
arena
where,
at
the
time,
Redback
held
a
dominant
position,
but
where
Nortel
was
developing
a
highly
competitive
product.
The
product
never
saw
the
light
of
day
and
Redback
was
eventually
acquired
in
2007
for
1.9Billion
USD
in
cash
by
Ericsson.
Nortel
is
unable
to
cope
with
existing
contracts,
continue
to
be
the
technology
innovator
it
once
was
and
has
destroyed
any
of
its
remaining
value.
17

18. We
could
of
course
not
blame
it
all
on
Mike,
or
can
we?
It’s
clear
that
for
the
past
five
(5)
years
the
telecommunications
market
has
changed
at
a
high
pace.
Nortel
never
did
recover
from
the
mistrust
created
after
the
accounting
scandals
and
its
debt
necklace
became
heavier
year
after
year.
It
could
have
been
a
tad
unrealistic
for
the
market
to
expect
Mike,
the
triathlon
participant,
to
run
in
ski
boots
and
a
wetsuit
while
carrying
a
bike
over
his
shoulders
and
being
chased
by
a
mob.
Granted
it
was
an
impossible
task,
but
while
we
know
that
Nortel’s
CEO
was
still
using
a
private
jet
just
six
(6)
days
after
Nortel
filed
for
bankruptcy
protection
and
as
the
company
announced
non-­‐compensated
dismissals
for
thousands
of
workers,
refused
salary
increases,
instituted
further
cost-­‐cutting
measures
and
confirmed
that
previously
dismissed
Nortel
employees
will
not
be
receiving
severance
payment
because
of
the
bankruptcy
filing,
one
can
wonder.
Greed,
check;
deceit,
check;
incompetence,
check;
plain
bad
judgment
based
on
desperation
and
on
managing
by
indicators
rather
than
value
creation,
check.
All
of
Nortel’s
mishaps
fall
in
one
of
the
previous
categories.
As
such,
we
must
not
forget
the
role
that
investment
companies
and
advisors
also
had
in
this.
AT
Nortel’s
peak,
fund
managers
rushed
to
comply
with
investors’
wishes
to
invest
in
Nortel
stock.
As
a
company,
Nortel
did
a
great
job
of
over-­‐valuating
the
impact
of
their
innovations
while
selling
themselves
as
the
only
company
that
could
be
a
major
force
for
operators,
enterprises
and
end
consumers.
Well,
Nortel
did
not
achieve
that,
but
Cisco
certainly
did.
Of
course,
at
the
time,
nobody
even
thought
of
a
company
like
Nortel
going
bankrupt
and
any
fund
manager
that
avoided
the
stock
based
on
strict
fundamentals
was
deemed
as
incompetent,
lost
their
customers
and
some
even
their
jobs.
On
the
descent,
as
Nortel
was
killing
the
company,
shredding
workers,
selling
and
shutting
down
units,
continuing
to
miss
revenue
and
profit
targets,
people
would
still
ask
“so
when
is
it
going
to
recover
“.
We
know
the
answer
now
and
we
should
have
seen
it
then;
recovery
was
never
to
be.
Upon
his
departure,
Zafirovski
says
that
Nortel
will
live
on
in
one
form
or
another.
It
will
certainly
live
in
the
memories
of
many.
The
Nortel
we
loved
as
employees,
as
shareholders
and
as
admirers
of
technological
innovation,
that
Nortel
is
long
gone.
Nortel
has
indeed
left
the
building;
in
fact
it
has
left
the
whole
industry
and
has
taken
all
of
its
value.
18

19. 19
8. Nortel
Bankruptcy
–
Possible
future
developments
Breaking
up
the
family
jewels
into
Business
Units
Right
after
Nortel,
Canada’s
100-­‐year
old
communications
company,
went
into
Chapter
11
bankruptcy
protection
in
January
of
2009,
it
immediately
started
the
split
process.
The
basis
of
this
process
was
to
divide
Nortel
into
several
self-­‐supporting
business
units
which
could
be
sold
off
separately.
Nortel
split
its
business
into
four
divisions:
Carrier
Networks,
Metro
Ethernet
Networks,
Enterprise
Solutions
and
the
LG-­‐Nortel
joint-­‐venture.
The
breaking-­‐up
clearly
affected
Nortel’s
first
quarter
revenues
falling
by
37%
to
$1.73bn
and
the
company
made
a
loss
of
USD
$244M
in
the
first
three
months
of
2009.
First
quarter
results
showed
a
decline
in
revenue
and
margins
as
expected
due
to
the
severe
economic
downturn
as
well
as
Nortel’s
creditor
protection
filings.
Despite
the
declines,
revenue
had
actually
stabilized
and
cash
balance
was
stable
as
of
year-­‐end
2008.
Nortel’s
purpose
in
breaking
up
the
company
into
divisions
was
to
concentrate
its
businesses
and
get
the
most
value
for
shareholders
and
creditors.
These
were
key
considerations
in
the
decision-­‐making
process
as
they
continued
to
evaluate
the
ultimate
path
forward
for
the
businesses.
It
appears
that
at
the
time,
there
were
discussions
being
held
with
external
parties
in
order
to
evaluate
all
restructuring
alternatives.
The
move
to
stand-­‐alone
units
provided
Nortel
with
maximum
flexibility
and
it
even
expanded
its
shared
services
organization
in
order
to
improve
support
for
its
standalone
business
units.
However,
the
split
will
not
bring
immediate
relief
to
the
failed
company.
Nortel
employees
across
the
regions
were
taking
legal
actions
to
prevent
further
illegal
redundancies.
For
example,
a
portion
of
Nortel
staff
laid
off
in
the
UK,
did
not
receive
any
redundancy
pay
or
proper
notice
period.
Nortel’s
ecosystem
–
partners,
suppliers,
customers
–
suffered.
There
were
other
employee
protests
before
the
UK
Parliament
and
demonstrations
outside
Ernst
&
Young's
offices
in
London.
E&Y
are
Nortel's
administrators
and
employees
protested
that
Ernst
and
Young
allowed
$23m
in
bonus
payments
to
senior
Nortel
execs
while
approving
redundancies.

20. 20
9. What’s
left
of
Nortel
–
what
might
happen?
Below
is
a
brief
overview
of
the
main
Nortel
divisions
still
standing
at
the
beginning
of
2009
and
what
has
transpired
up
to
the
time
in
which
we
concluded
our
project.
Enterprise
Solutions
Enterprise
solutions
for
internet,
VoIP,
security,
multimedia
messaging,
call
centers
and
integrated
software
applications
for
small
companies
&
large
multinationals.
Nortel’s
enterprise
division
holds
a
strategic
alliance
with
Microsoft
since
2006.
Further,
this
division
signed
a
channel
distribution
agreement
with
Dell
and
in
turn
Dell
provides
professional
services
to
the
combined
Nortel
enterprise
&
Dell
solutions.
Nortel’s
Enterprise
Networks
was
eventually
sold
to
AVAYA
in
September
of
2009
for
USD
$950M.
Other
potential
suitors
were
Siemens
alongside
the
private
equity
firm
Gores
Group.
Carrier
Networks
Nortel’s
Carrier
Networks
division
provides
Mobility
and
Carrier
Networking
Solutions
specifically
designed
for
mobile
operators.
The
business
includes
GSM,
GPRS
and
EDGE
systems
for
major
operators
around
the
world.
A
significant
portion
of
Nortel’s
Carrier
Networks
division
(not
including
GSM/GSM-­‐R)
was
sold
to
Ericsson
for
USD
$1.13Billion
in
July
2009.
Other
potential
suitors
for
this
particular
business
included
NSN
alongside
the
private
equity
firm
Mattlin
Patterson.
The
remaining
GSM/GSM-­‐R
business
was
also
purchased
by
Ericsson
&
Kapsch
in
October
of
2009
for
USD
$103M.
Metropolitan
Ethernet
Networks
(MEN)
Nortel’s
MEN
is
the
coveted
asset
of
the
family.
Nortel’s
MEN
provides
operator
solutions
for
the
unprecedented
internet
traffic
growth
and
the
implementation
of
IP
networks
combined
with
optical
technologies.
Nortel’s
MEN
applies
to
both
major
carriers
and
enterprises
and
is
a
preferred
partner
for
major
international
and
pan-­‐European
networks.
For
the
purposes
of
our
project,
we
have
concentrated
our
analysis
in
Nortel’s
MEN
division
since
this
is
actually
the
first
division
that
was
considered
for
sale
and
the
one
which
has
incited
the
highest
amount
of
interested
parties
while
only
representing
14%
of
the
overall
Nortel
businesses.
It
seems
that
all
significant
players,
whether
small,
medium-­‐sized,
or
mammoths,
in
the
telecom
world
are
in
one
way
or
another
interested
in
Nortel’s
MEN.
We
will
describe
and
elaborate
the
reasons
why
we
believe
there
is
in
fact
an
interest
and
then
we
will
enumerate
the
considerations
as
to
which
companies
will
want
to
buy
these
bankrupt
assets.
We
have
launched
ourselves
into
the
ring
and
picked
one
of
the
top
contenders
and
will
endeavor
to
analyze
the
detailed
reasons
and
fundamental
facts
that
we
believe
justify
a
purchase
by
this
top
contender.
However,
we
do
want
to
point
out
that
no
matter
which
of
these
companies
eventually
ends
up
with
the
assets,
they
will
all
have
a
common
issue:
incomplete
information.
The
suitor
which
proves
to
have
stamina,
higher
commitment
and
goes
above
and
beyond
during
the
due
diligence
process,
will
stand
out
from
the

21. pack
and
prevail.
Further,
that
same
commitment
will
be
essential
to
actually
complete
any
integration
into
an
existing
company
structure
as
well
as
in
adapting
the
company
to
a
joint
culture.
Why
would
anyone
want
these
assets?
Nortel's
products
are
indeed
top
class,
they
have
built
a
strong
customer
base
over
the
years
and
for
small
to
mid-­‐size
suitors
it
could
be
an
instantaneous
manner
to
roughly
double
revenues.
The
concerns
here
should
focus
around
the
fact
that:
MEN
business
has
not
recently
generated
a
significant
amount
of
cash
from
operations,
the
ethernet
market
segment
is
highly
price
sensitive
and
revenue
outlook
for
2010
may
prove
lower
(less
than
USD
$
1Billion)
due
to
any
integration
uncertainties.
In
addition,
the
suitor
has
to
have
a
plan
to
deal
with
Nortel’s
inability
to
maintain
an
acceptable
degree
of
customer
satisfaction
in
their
major
high-­‐
margin
customers
during
the
past
few
years.
Nortel's
Metro
Ethernet
Networks
includes
the
following
products
21
• long-­‐haul
transport
• metro
optical
ethernet
switching

22. 22
• ethernet
switching,
transport
and
aggregation
• associated
management
systems
Nortel’s
MEN
division
currently
has
an
annual
revenue
run
rate
of
roughly
$1.2B
and,
surprisingly,
it
is
a
break-­‐even
unit.

23. 10.
Which
companies
will
be
interested
in
Nortel’s
MEN
?
Why
?
We
believe
that
the
companies
that
can
have
an
interest
in
Nortel’s
MEN
assets
are:
Cisco,
Alcatel
Lucent,
Ericsson,
Huawei,
Tellabs,
Infinera,
Nokia
Siemens
and
Ciena.
For
the
purpose
of
the
project,
we
will
discuss
here
only
the
ones
we
consider
the
most
relevant.
It
is
a
possibility
that
all
of
them
will
be
certainly
snuffling
around
these
assets
to
gain
competitive
information,
regardless
of
whether
or
not
they
actually
have
an
intention
of
acquiring
or
bidding
for
the
assets.
In
our
view,
only
a
few
of
them
have
a
true
interest
in
the
acquisition;
the
key
vendors
that
may
fully
grasp
the
true
value
proposed
by
these
assets
and
that
have
the
appropriate
willingness
to
pay
may
be
Nokia
Siemens
and
Ciena.
As
such,
these
two
companies
are
discussed
last
in
this
section.
CISCO
Cisco
would
love
to
get
their
hands
on
Nortel’s
Optical
Assets.
Cisco
has
the
highest
amount
of
cash
available
of
any
telecom
player
today
(USD
$35B)
and
the
highest
rate
of
success
in
the
acquisition
arena
(more
than
150
since
1993).
However,
integration
of
a
business
unit
that
also
requires
a
degree
of
turn-­‐around
activities
is
not
Cisco’s
strength.
Given
the
information
we’ve
analyzed,
we
can
see
that
Nortel
MEN’s
division
will
require
a
turn-­‐around
specialist
in
order
to
provide
true
return
for
all
possible
buyers.
ALCATEL
LUCENT
Based
on
our
analysis,
we
do
not
necessarily
believe
that
Nortel
MEN’s
portfolio
will
fit
well
into
the
existing
Alcatel-­‐Lucent
product
line.
Alcatel-­‐Lucent
already
enjoys
leadership
in
three
(3)
of
the
four
(4)
market
segments
covered
by
MEN
and
the
gap
between
their
number
one
position
will
not
be
easily
challenged
by
any
company
that
is
placed
either
3rd
or
4th.
Alcatel-­‐Lucent’s
leadership
is
currently
focused
on
their
strategic
initiative
rather
than
on
restructuring
and
integrating.
Further,
the
previous
integration
of
Nortel’s
3G
UMTS
division
into
Alcatel-­‐Lucent
was
not
a
complete
success.
ERICSSON
Ericsson
is
quite
busy
digesting
their
latest
acquisition:
Nortel’s
Carrier
Networks
division
for
USD
$1.13B.
Ericsson
has
a
40G
solution
and
firm
plans
and
trials
for
their
100G
products.
However,
acquisition
of
Nortel’s
MEN
will
allow
them
to
speed
up
their
entrance
into
the
100G
market.
HUAWEI
Acquisition
by
Huawei
makes
a
lot
of
sense.
Not
only
will
Huawei,
will
gain
entry
into
the
long-­‐
coveted
US
market,
but
it
will
also
complement
its
own
optical
portfolio.
The
issue
is
that
Huawei
will
still
be
considered
a
foreign
entity
and
does
not
offer
any
evident
guarantees
to
Nortel’s
existing
US
government
contracts.
The
idea
of
transporting
“government
sensitive”
traffic
is
not
a
pill
easily
swallowed
and
will
be
tough
to
get
approval.
23

24. TELLABS
While
Tellabs
can
profit
from
MEN’s
assets
in
the
optical
market,
it
is
not
an
optical
specialist
in
the
same
realm
as
NSN
or
Ciena.
Further,
Tellabs
has
recently
invested
USD
$200M
to
repurchase
its
stock
and
so
their
bank
account
may
not
be
ready
for
further
disbursement.
INFINERA
Infinera
is
also
one
of
the
leaders
in
the
digital
optical
network
market
and
should
be
a
major
contender
for
Nortel
MEN’s
assets.
We
believe
that
Infinera
needs
to
first
assess
if
acquiring
technology
that
they
are
already
develop
makes
sense
for
the.
Additionally,
Infinera
will
need
to
associate
itself
with
an
entity
that
will
sponsor
the
acquisition.
For
example,
a
private
equity
firm
will
need
to
be
assured
by
Infinera’s
management
that
they
can
provide
strategic
direction
to
their
business
given
the
expected
lower
growth
in
the
optical
market
and
margin
pressure
over
time.
An
interesting
fact
about
Infinera
is
that
about
70%
of
top
management
came
from
Ciena
and
its
acquisition
of
Lightera.
Ciena
is
discussed
further
in
the
document.
NSN
Based
on
our
analysis,
Nokia
Siemens
is
certainly
motivated
to
go
after
Nortel
MEN’s
division.
NSN
has
approximately
USD
$1.2Billion
in
cash
and
could
still
be
aching
from
losing
the
wireless
bid
to
Ericsson.
Nokia
Siemens
Networks
has
recently
announced
it
was
seeking
out
acquisitions
that
will
enhance
the
scale
of
existing
product
and
service
business
lines
and
deepen
relationships
with
key
customers;
all
of
this
while
still
announcing
a
major
corporate
restructuring
and
plans
to
lay
off
up
to
6,000
employees.
After
unsuccessfully
bidding
for
Nortel's
wireless
business,
we
know
Nokia
Siemens
does
have
the
capacity
to
place
a
competitive
proposal
and
could
be
faced
with
Ciena
in
the
run
for
Nortel’s
MEN.
Nokia
Siemens
was
the
stalking
horse
bidder
for
Nortel's
CDMA
business
and
LTE
assets
but
was
quickly
bumped
off-­‐course
by
Ericsson
AB
in
the
auction.
Looking
at
their
product
portfolio,
it
will
make
sense
for
Nokia
Siemens
to
get
a
slice
of
Nortel's
optical
and
metro
Ethernet
business.
NSN
is
a
true
contender
and
we
believe
that
they
will
be
eager
to
acquire
the
Canadian
vendor's
MEN
assets
as
it
will
significantly
boost
its
presence
in
North
America.
NSN
has
the
motivation
to
establish
presence
through
the
MEN
business
and
Nortel's
customer
base
and
does
not
want
to
be
content
with
simply
observing
mobile
vendor
rival
Ericsson
bulk
up
in
that
particular
region
and
also
step
into
their
core
wireless
business.
24
CIENA
As
we
noted
before,
Ciena
is
in
a
comfortable
cash
position
with
USD
$1.2B
in
cash
reserves;
this
is
though
coupled
with
USD
$800M
in
debt.
We
have
estimated
Nortel
MEN’s
value
to
around
USD
$580M
and
Ciena
will
need
even
more
cash
than
that
to
acquire
Nortel’s
MEN.
We
do
believe
that
Ciena
is
actually
in
a
good
position
without
any
acquisition
and
avoiding
any
integration
challenges.
However,
there
are
indeed
benefits
to
the
deal
and
there
are
associated
costs.
Ciena
can
immediately
double
its
sales
and
major
customers,
such
as
Verizon,
AT&T,
Qwest,
and
Sprint,
have
expressed
approval
to
such
an
acquisition.
Ciena
needs
to
do
the
analysis
for
themselves
but
more
importantly
for
the
other
side
and
their
competitors
as
well.
Ciena
can
capitalize
on
Nortel’s
Sonet/SDH
customer’s
needs
to
upgrade
their
networks
to
WDM
gear.
Ownership
of
MEN
wouldn't

25. guarantee
Ciena
those
upgrades,
but
Ciena
will
be
better
placed
to
make
the
upgrades
as
an
incumbent
and
not
as
another
player.
Ciena
will
also
be
able
to
accelerate
its
40-­‐Gbit/s
and
100-­‐Gbit/s
developments.
Even
though
Ciena
has
already
made
a
mark
in
100
Gbit/s,
Nortel’s
technology
in
this
area
is
more
advanced
than
Ciena’s.
Ciena
would
own
Nortel’s
40-­‐Gbit/s
technology
rather
than
continue
to
source
it
from
Opnext
Inc.
Ciena
will
need
to
perform
a
thorough
due
diligence
on
Nortel’s
MEN
assets
as
it
needs
to
have
a
strategy
for
its
40G
market
incursion.
Some
of
Nortel’s
talent
has
already
left
and
there
is
no
true
and
clear
indication
of
the
value
remaining.
MEN
is
indeed
damaged,
but
it’s
recoverable.
Ciena
needs
to
value
the
benefits
and
costs
of
both
the
acquisition
for
MEN
as
well
as
their
contingency
plan.
Ciena
top
management
and
portfolio
directors
need
to
know
how
Fujitsu
and
NSN
will
respond
to
the
bid.
Ciena
must
be
committed
to
the
transaction
but
not
at
the
cost
of
purely
maintaining
a
course
of
action
based
on
the
decision
to
bid,
but
on
the
firm
target
of
creating
value
for
the
company.
What
Nortel
debtors
are
currently
looking
for
is
certainly
a
high
price
for
MEN.
However,
it
is
also
clear
that
these
debtors
will
not
simply
want
the
company
bought
at
a
high
price
and
without
a
majority
of
cash
consideration.
On
that
note,
the
debtor’s
interest
is
for
the
company
to
be
prolonged
and
in
turn
for
the
recovery
of
the
debts
incurred.
Ciena
needs
to
show
that
commitment
by
re-­‐assuring
the
debtors
on
their
leadership
in
the
optical
switching
market
segment
and
their
firm
intentions
to
attain
a
place
amongst
the
top
three
(3)
optical
vendors.
With
this
in
mind,
the
debtors
and
remaining
MEN
employees
will
be
motivated
to
stay
and
be
part
of
the
new
reformed
structure.
If
Ciena
is
clear
and
fair
regarding
the
value
to
be
placed
on
Nortel
MEN’s
assets,
it
will
not
cave
in
into
a
bidding
war
and
will
show
that
it
values
MEN
as
much
as
MEN
employees.
This
signal
will
be
key
for
the
costly
integration
and
for
avoiding
and
reducing
unnecessary
costs.
As
the
stalking-­‐horse
bidder,
CIENA
is
currently
offering
769
Million
(530
in
cash
and
239
in
convertible
bonds)
as
compared
to
NSN
+
OneEquity
Partners’
all
cash
offer
of
USD
810M
An
important
point
for
the
eventual
acquirer
will
be
their
integration
experience.
Ciena
has
a
mixed
track
record
with
acquired
companies
(Lightera,
Omnia,
Cyras,
ONI
Systems,
Wavesmith,
Catena,
World
Wide
Packets).
All
companies
have
eventually
been
integrated
into
Ciena’s
solutions,
but
have
incurred
a
relative
cost.
Financially,
Ciena’s
stock
still
has
potential
gains
since
it
has
actually
sold
for
much
higher
multiples
(net
cash
sales)
relative
to
current
levels.
The
optical
market
is
full
of
competitors
and
Ciena
is
one
of
the
clear
leaders
(if
not
the
premier
company)
in
their
space.
Ciena
has
a
fairly
stable
management
team
and
has
endured
the
rough
pre,
during
and
post
bubble
times
and
came
out
of
it
stronger
and
leaner.
Ciena
will
benefit
from
the
acquisition
because
it
will
beat
NSN
to
the
punch
by
gaining
advanced
40-­‐
and
100-­‐Gbit/s
technology,
will
gain
US
customers
and
a
MEN
business
with
revenues
around
USD
$1B
billion.
Ciena
will
add
operational
scale
and
weight
to
its
“mid-­‐size
vendor”
tag
and
provide
competitive
guns
against
ALU
and
Huawei.
In
terms
of
the
acquisition,
Ciena
needs
to
concentrate
on
the
integration
risks,
the
product
overlap,
headcount
and
cultural
aspects
while
still
managing
the
operational
and
value
creation
aspects
of
the
acquisition.
Another
important
aspect
is
Ciena’s
shareholders.
The
amount
of
cash
being
put
in
the
table
leaves
Ciena’s
wallet
much
lighter
and
will
certainly
have
a
negative
effect
on
its
share
price.
Once
again,
this
should
not
deter
Ciena
management
from
continuing
on
their
path
to
achieve
value
25

26. Ciena
will
have
to
integrate
a
part
of
MEN’s
unit
that
is
traditionally
a
low
growth
and
low
margin
business
and
will
weaken
its
balance
sheet
while
still
allowing
it
to
gain
market
share
and
potentially
become
the
third
largest
optical
vendor.
The
integration
will
benefit
about
80%
of
MEN’s
employees
since
they
will
be
extended
a
contract
in
a
more
solid
company.
Certainly,
ALU
and
NSN
will
try
to
capitalize
on
the
uncertainty
surrounding
Ciena’s
capacity
to
integrate
Nortel’s
MEN.
Ciena
needs
to
take
that
opportunity
to
become
stronger
and
a
tougher
rival.
To
defend
its
turf,
Ciena
faced
a
difficult
decision
to
either
gain
scale
or
defend
its
smaller
niche
business
from
increasingly
larger
foes.
In
effect,
Ciena
was
forced
to
buy
the
Nortel
businesses,
if
for
no
other
reason
than
to
keep
it
out
of
the
hands
of
Ericsson,
which
is
becoming
a
dominant
force
in
telecom
equipment
supplies.
Ciena
says
it
has
been
considering
the
move
for
a
year.
When
Nortel
put
its
various
businesses
up
for
sale
last
year
as
it
prepared
for
bankruptcy,
the
early
bids
for
the
Ethernet
business
were
reported
to
be
about
$1
billion.
Ciena
has
been
evaluating
the
purchase
for
a
year,
and
given
the
price
of
the
deal,
clearly
benefited
by
the
passage
of
time
and
the
lack
of
enthusiastic
interest
from
other
potential
acquirers.
Looking
at
individual
products,
there's
a
lot
of
difference
between
Ciena
and
Nortel.
Ciena's
Core
Director
doesn't
have
an
analogue
inside
Nortel,
and
Nortel
has
a
multiservice
Sonet
/SDH
business
that
Ciena
lack.
But
the
companies
share
an
interest
in
WDM
transport.
In
2008,
those
products
represented
53
percent
of
Ciena's
revenues
and
55
percent
of
Nortel's
optical
revenues.
26

27. 27
11. Conclusions
It
was
a
powerful
era.
Nortel,
the
landmark
reference
for
telecom
in
Canada,
once
an
international
structure
at
times
standing
90
000
person
strong
with
a
turnover
above
30
Billion
Dollar
and
once
a
market
value
of
400
Billion
remained
for
year
a
reference
in
the
global
industry.
Then
reality
caught
up.
Years
and
even
decades
of
mismanagement
accompanied
by
bad
strategic
decisions
took
the
company
down
death
row.
Only
through
last
minute
sell
offs
could
values
around
4
Billion
Euros
be
saved
and
eventually
distributed
to
creditors.
The
era
ends.
Now,
the
question
remains,
what
can
be
learnt
from
the
Nortel
saga?
Are
there
important
specific
events
and
strategic
actions
that
actual
lead
to
the
demise?
Well
yes,
there
were
some.
The
company
stemmed
from
a
very
old
engineering
culture;
it
is
believed
that
the
very
strong
and
rapid
market
movements
were
better
caught
by
competitors
structured
around
light
and
structure
with
less
inertia.
The
managerial
environment
has
also
often
come
up
as
one
of
the
reasons
for
the
decay.
By,
possibly
unconsciously,
disconnecting
the
key
performance
indicators
at
local
level
with
the
better
interests
of
the
company
as
a
whole,
multiple
examples
of
sub
optimized
and
even
counterproductive
measures
can
be
recognized.
The
crowning
of
the
downfall
was
probably
initiated
in
the
late
2000
when
the
accounting
and
corruption
scandals
around
Roth
and
his
team
members
were
brought
to
daylight.
Ever
since,
the
company
struggled
with
falling
stock
prices,
and
lack
of
confidence
in
the
market.
The
then
following
CEOs
did
not
have
what
it
would
take
to
turn
such
a
giant
around.
Dunn
was
the
ex
CFO,
already
tainted
by
the
scandals
and
incapable
of
reinstating
confidence.
He
was
in
his
turn
followed
by
an
Admiral,
a
man
of
the
military
stem,
certainly
apt
to
lead,
but
sadly
unapt
to
manage
a
multinational
enterprise.
The
relatively
early
decision
to
sell
off
the
UMTS
business
seems
in
retrospective
to
have
been
a
critical
misjudgment,
but
Zafirovski
still
to
this
day
claims
that
the
business
area
was
not
strong
enough
to
gain
the
strategic
market
leader
position.
Was
that
a
good
decision
based
on
factual
consequences,
or
a
power-­‐man’s
decision
not
to
continue
a
cash
producing
part
of
the
destabilized
company?
Financial
analysis
shows
a
lack
of
volume
and
reserve.
The
last
years
of
its
existence,
the
company
managed
to
restructure
some
important
cost
issues,
but
the
so
necessary
new
product
spectrum
was
due
far
too
late
in
the
future.
We
believe
it
is
fair
to
say,
that
the
Nortel
structures
were
no
longer
adapted
to
a
very
volatile
market
and
the
managements
assigned
to
restructure
far
too
financial.
Only
a
deep
core
boring
would
have
revealed
the
innermost
difficulties
of
the
company,
and
possibly
allowed
for
corrective
action.
Is
this
possible
with
high
level
star
managers?
Or
is
it
necessary
to
let
new
blood
in
that
addresses
these
situations
even
more
in
vivo?
Many
questions
remain
unanswered
in
this
story,
but
one
thing
is
evident.
The
Nortel
name
is
sadly
no
longer
the
symbol
of
fortune
but
utter
demise.

28. 28
12. Appendices