Nortel’s Latest Crisis Shows Deep-Rooted Problems

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 itsexposure to next-generation wireless technology in a bid to survive itslatest crisis, but the competitive and macroeconomic woes facing thecompany are much more profound.

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

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

Telecom companies have scaled back spending on equipment andupgrades amid a broad economic downturn. As well, there is intensecompetition in the telecom equipment market, both from North Americanand 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 theyare very likely to continue to haunt its fortunes, regardless of anyrestructuring it may undertake.

"The fundamental problem is there’s too many people in thisbusiness, none of them are quitting and the markets aren’t developingnearly as fast as the bulls have said," said Ed Snyder, an analyst atCharter 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 ofinvestors, who drove the company’s shares down to new lows on theToronto Stock Exchange on Wednesday before bouncing back slightly onThursday 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 MetroEthernet Networks (MEN) and limits its investments in future wirelesstechnologies, some think it may soon lose that perch, riskingirrelevance.

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

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

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

Since 2001, it has lost billions of dollars, shed thousands of jobsand has been unable to turn a consistent profit because of weak demandand intense competition. Even before this week’s announcement, itsshare 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 inInternet video and gaming, and a boom in use of mobile video phones. Ithas repositioned the money it spends on research and development tomove away from older gear.

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

The company, once the most heavily weighted stock on the Torontomarket, now has a market cap of only about C$1.5 billion ($1.4billion). 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 tosurvive.

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

($1=$1.07 Canadian)

(Reporting by Wojtek Dabrowski; editing by Rob Wilson)