Nortel might have a hard time getting any new business, though. A whopping 71% of surveyed non-Nortel customers said that they will not consider solutions from Nortel now or in the near future in a recent Web survey conducted by Parsippany, N.J.-based research firm IntelliCom Analytics and TMCNet.
Indeed, Nortel already is losing prospective customers to competitors like Avaya and Cisco post-bankruptcy. One enterprise looking to buy an IP telephony unified communications system dropped Nortel from consideration a few days after the bankruptcy announcement, reports Gary Audin, president of Delphi Inc., in Arlington, Va.
But before you start selling your Nortel equipment on eBay, make sure you get your facts straight. “Too many people assume that bankruptcy means [a company] is going out of business,” says Gary Audin, president of Delphi Inc., in Arlington, Va. Though it’s not the best sign for business, filing for Chapter 11 allows Nortel protection from creditors while giving it time to reorganize.
Voice Report posed the five most likely possibilities for Nortel’s immediate future to expert telecom analysts and asked what effect that each could have on enterprise telecom managers.
Nortel For Sale?
There is a strong possibility that Nortel will sell at least a part of its company, says Mark Ricca, partner and senior analyst for IntelliCom Analytics.
But what, exactly, would Nortel sell? Someone could buy one or more of Nortel’s three entities (metro Ethernet, enterprise, carrier), predicts Byron Battles, principal consultant at the Battles Group, in Silver Spring, Md., and former president of the Society of Telecommunications Consultants. “This is a challenge for Nortel. They have to decide: ‘What do we want to be?’” he says.
Possibility 1 – Nortel sells its enterprise side: Nortel’s enterprise branch is the most attractive to a potential buyer, Audin says. Though the carrier side has bigger sales, they take much longer to go through than the enterprise side’s smaller, quicker sales. In this economy, businesses are looking for instant earnings rather than long-term planning, he explains.
Ricca believes that if a company were to buy Nortel’s enterprise side, it would buy the Nortel name along with it. “The name has a relationship with quality and service,” he explains, and enterprise customers will put their trust in that name.
As for who might want to buy the enterprise side of Nortel, experts can only speculate. Since the Canadian government is concerned about the financial condition of Canada’s market and Nortel’s Canadian shareholders, they will most likely want another Canadian company to carry on Nortel’s name, Ricca explains.
Ricca predicts that Canadian IP systems manufacturer Aastra might be a top contender. “They have the cash, and the Canadian roots,” Ricca points out. He also notes that Aastra has been on an “acquisition kick” for the past two years. Aastra purchased Swedish telecom systems provider Ericsson in 2008 for $103 million, proving its ability to successfully acquire large companies.
Audin believes it’s possible that a Chinese firm such as equipment supplier Huawei could be interested. Huawei certainly has the money for it, he says. However, fears about Chinese “cyberspying” could cause the Canadian government to stop any such deal in its tracks. The Canadian government could restrict non-Canadian companies from buying parts or all of Nortel, the way the U.S. government prevented Huawei from buying 3Com in 2008.
Microsoft also might be a possible buyer, Battles believes. Microsoft and Nortel already have formed the Innovative Communications Alliance (ICA) which unites them as a unified communications entity, so an acquisition could make a perfect solution for the enterprise side, Battles says.
However, some experts think that Microsoft wouldn’t consider buying Nortel. Both PBX guru Allan Sulkin, president and chief analyst for Hackensack, N.J.-based TEQConsult Group, and unified communications authority Marty Parker, principal of Loomis, Calif.-based UniComm Consulting, agree: Since Microsoft is a software company that provides software licensing, it probably doesn’t want to buy a hardware manufacturing company.
As for the future of the ICA, Parker believes the two companies will not only keep the relationship going, but that they will nurture it. Nortel wouldn’t walk away at this point, and Microsoft has been reaping the benefits of its partnership with Nortel thus far, Parker says.
Microsoft says that all ICA offerings are currently available and that no changes are planned. However, it refuses to assess the future of the ICA until it understands Nortel’s plans, a company spokesperson says.
Worst-case scenario for enterprise voice pros under this possibility: The acquirer of Nortel could be a PBX competitor more interested in grabbing Nortel’s market share than continuing to support a rival’s products, which would leave loyal Nortel users without support for their PBXs.
Possibility 2 – Nortel keeps its enterprise side but sells other parts: Just as the enterprise group might catch the interest of potential buyers, it’s also the division Nortel might be most interested in keeping.
The enterprise side is much more valuable to Nortel than its other parts due to its extremely loyal installed base of customers, and their trust in Nortel’s equipment, says IntelliCom’s Ricca.
About 70% of Nortel’s enterprise installed base in North America is confident that Nortel will remain intact after it restructures, and has no plans to halt planned investments with the company, according to the IntelliCom/TMCNet survey.
Nortel most likely will sell off parts to raise funds and focus on a core part for its remaining business, Battles predicts.
In the event that either of these two possibilities becomes reality, telecom managers who rely on Nortel equipment probably will not be affected greatly. Though the carrier and metro Ethernet businesses would dissipate, the enterprise side would remain intact, backed by the Nortel name.
Possibility 3 – Someone buys all of Nortel to liquidate it: An entity could buy Nortel just to “milk it dry” until it goes out of business, Sulkin says. They would stop producing new equipment, sell to Nortel’s base until the equipment in stock runs out and try to make a profit. “The Canadian government wouldn’t like that very much,” Sulkin says.
Neither would telecom managers. A liquidation would force everyone to either spend money to update their systems or go without support for as long as their systems would hold out.
As for a company buying all of Nortel with the intent to keep it up and running? “I don’t think anyone has the stomach to buy the entire company,” Ricca says. He believes it most likely will be split.
In any case, whoever buys parts or all of Nortel would acquire a lot of debt, Sulkin says. Indeed, the company had $4.5 billion in long-term debt as of Sept. 30, 2008, $20 million of it due within a year. Because of this, though, Nortel would come cheap. Sulkin predicts Nortel would sell for its market value of around $250 million.
One thing’s for sure: If Nortel decides to sell, potential buyers will be ready. “Everyone’s targeting them like vultures,” Sulkin says.
Following in Avaya’s Footsteps … or Circuit City’s?
If Nortel doesn’t want to see its company split up or put to rest, it would still have a few options.
Possibility 4 – Nortel goes private and functions like Avaya: Nortel could follow in Avaya’s footsteps by selling not to a competitor, but instead to private equity groups that would keep Nortel together in its entirety, Audin suggests.
If Nortel goes private, it would be able to focus on a more long-term strategy instead of worrying about the public market’s reaction, or about making a huge profit each quarter, Audin says. But there is always the chance that the private owners could tear the company apart and liquidate assets, like in Circuit City’s current situation.
A private Nortel, though it might not affect the types of services provided by the company, might worry some telecom managers. The typical time frame for a private equity firm to flip its acquisition for more than it paid is three to five years. It would put great pressure on Nortel to improve its value in a relatively short amount of time [VR 6/11/07]. This pressure could ultimately take focus away from personal service, legacy product lines and small channel dealers.
Possibility 5 – Nortel remains whole and simply restructures its debt: Nortel has assured customers, among them Presbyterian Health Services’ Birmingham, that the only action it will be taking is strictly a reorganization of debt that will allow it to continue normal operations, she says.
Though it is unlikely that Nortel will be able to afford to keep the company entirely intact and unchanged, Delphi’s Audin says that the goal is to come out of bankruptcy less leveraged than its competitors.
A Gartner report on the subject predicts that Nortel’s reorganization will take about 18 months. Gartner believes Nortel should then emerge as a viable company, but the report cautions that the manufacturer “could look different and be a possible target for acquisition.”
This solution might seem like a best-case scenario for telecom pros, but ultimately, it’s not the most likely possibility, IntelliCom’s Ricca says.
Hound Your Account Rep For Answers
Ricca’s advice to telecom managers who have Nortel systems installed: “Don’t panic! Nortel is not going to turn to dust.”
Especially not the enterprise side. Though the carrier and metro Ethernet branches might not survive, the enterprise side has too great a base of customers to go “belly up,” Audin says.
However, Ricca, Battles, Audin and even Victor Bohnert, executive director of the International Nortel Networks Users Association (INNUA), agree: it is your responsibility as telecom manager to thoroughly question your Nortel account rep, especially if you are considering buying Nortel products. “The worst thing you can do is buy a solution only for it not to be supported later,” Ricca says.
Presbyterian Health Services’ Birmingham believes that Nortel will be a viable solution for her company, but she worries that her senior executives might have doubts about approving Nortel upgrades. “A company’s financial stability always is something we take into account when we are making long term technology decisions.”
Sulkin recommends that existing Nortel customers should hold off on making any significant purchasing decisions for a year to 18 months. If you can’t wait, as in the case of a greenfield installation, expect aggressive incentives from Nortel’s competitors. (