Nortel's Latest Crisis Shows Deep-Rooted Problems

By Reuters -  |  Posted 2008-09-18

TORONTO (Reuters) - Nortel Networks Corp (NT.TO: Quote, Profile, Research, Stock Buzz) (NT.N: Quote, Profile, Research, Stock Buzz) is resorting to the sale of one its growth divisions and limiting its exposure to next-generation wireless technology in a bid to survive its latest crisis, but the competitive and macroeconomic woes facing the company are much more profound.

The potential sale of Metro Ethernet Networks, which includes the company's optical and carrier ethernet technology, caught some analysts by surprise. It's relatively small, but the unit accounts for about 14 percent of Nortel's revenue and has been showing promise with the recent launch of a new technology that lets telecom companies quadruple the capacity of their networks.

And as it announced on Wednesday that its 2008 revenue would be worse than expected, Nortel also said it was looking to "mitigate" its exposure to the wireless sector by partnering with others on developing riskier next-generation technology.

Telecom companies have scaled back spending on equipment and upgrades amid a broad economic downturn. As well, there is intense competition in the telecom equipment market, both from North American and European players such as Alcatel-Lucent (ALUA.PA: Quote, Profile, Research, Stock Buzz) (ALU.N: Quote, Profile, Research, Stock Buzz) and from low-cost Asian vendors like Huawei Technologies HWT.UL.

Ultimately, these are the factors behind Nortel's troubles and they are very likely to continue to haunt its fortunes, regardless of any restructuring it may undertake.

"The fundamental problem is there's too many people in this business, none of them are quitting and the markets aren't developing nearly as fast as the bulls have said," said Ed Snyder, an analyst at Charter Equity Research.

"The industry is not doing well and it's actually getting worse."

Nortel's latest plans for a turnaround didn't soothe the worries of investors, who drove the company's shares down to new lows on the Toronto Stock Exchange on Wednesday before bouncing back slightly on Thursday to trade at C$2.94.

They were worth more than C$1,100 each in mid-2000, adjusted for a stock consolidation that took place in late 2006.

The company is North America's biggest maker of telephone equipment. If it scales back on making network technologies by selling Metro Ethernet Networks (MEN) and limits its investments in future wireless technologies, some think it may soon lose that perch, risking irrelevance.

"Nortel's return to earth has left a trail of smoke and fire that has shattered the market's faith in management's ability to return Nortel to any semblance of normality," Richard Windsor, an analyst at Nomura Securities, wrote in a note to clients.

"Announcing the (revenue) warning and the sale of MEN at the same time makes it appear that the company is desperately selling off its crown jewels in order to stay afloat."

The bad news at Nortel is just the latest in a string of crises that has beset the Toronto-based company since the tech bubble burst at the start of the decade.

Since 2001, it has lost billions of dollars, shed thousands of jobs and has been unable to turn a consistent profit because of weak demand and intense competition. Even before this week's announcement, its share price had collapsed to lows not seen in decades.

Nortel has bet on a broad slate of existing and new technologies: products that will help telecom companies cope with explosive growth in Internet video and gaming, and a boom in use of mobile video phones. It has repositioned the money it spends on research and development to move away from older gear.

Despite those moves, 2008 revenues are now projected to decline instead of grow, and another wave of layoffs at Nortel is on the horizon. To make matters even worse, Nortel also has very limited visibility into its future. As recently as August 1, Chief Executive Mike Zafirovski said there was no restructuring in the cards.

The company, once the most heavily weighted stock on the Toronto market, now has a market cap of only about C$1.5 billion ($1.4 billion). It had a cash balance of C$3.07 billion at the end of June. Analysts are again starting to ask whether Nortel needs a merger to survive.

"It's tough," Snyder said. "It's a nasty business."

($1=$1.07 Canadian)

(Reporting by Wojtek Dabrowski; editing by Rob Wilson)