Declaring bankruptcy will provide Nortel Networks Corp. (NYSE: NT) with an asset it can’t purchase otherwise – time – as it attempts to survive as a company, two economists say.
“It buys them time to do an orderly restructuring,” Duke University professor Campbell Harvey said.
Added North Carolina State University professor Mike Walden: “Bankruptcy will allow Nortel to reorganize.”
However, both men said the telecommunications gear-maker, which employs 2,000 people in the Triangle, will emerge as a different and likely smaller company. Nortel filed for Chapter 11 bankruptcy protection Wednesday morning in Delaware and later in Canada. With its stock worth less than $1, Nortel has for several months been trying to sell business units and cut costs.
“This means they will likely sell of some of their business lines,” Harvey said of the Toronto-based firm that is the largest manufacturer of telecommunications equipment in North America.
According to Walden, Nortel entered bankruptcy with the “purpose of emerging as a smaller, yet more competitive firm.”
Nortel’s strategy appears to be survival, not liquidation, Harvey added.
“In order to emerge from the Chapter 11 process, divisions need to be sold,” he said. “It is not clear at this point that everything will be liquidated. My sense is ‘no’ because they chose Chapter 11 (whose purpose is for firms to eventually emerge from protection).
“Also, note that it was well known that NT was considering the bankruptcy option. After they went into penny-stock territory in November, The Wall Street Journal reported that they were seeking advice on potential filing,” Harvey said.
Bankruptcy moves ‘right steps,’ CEO says
Nortel Chief Executive Officer Mike Zafirovski said in a statement to employees that bankruptcy filings in the U.S. and Canada “are the right steps toward a solution for our company. This process will enable Nortel to become the highly focused and financially sound communications leader it should be.”
Zafirovski also stressed that the legal moves didn’t mean Nortel was ceasing operations.
“Most importantly, Nortel is still very much in business, and our commitment to customers remains unwavering,” he said. “We will continue to invest in leading edge R&D to deliver the value our customers expect from us.”
However, Walden warned that bankruptcy could harm Nortel in the marketplace.
“Bankruptcy does carry a stigma that may deter some buyers and users, but apparently the firm had no other option,” he said.
“The long-term viability has been in question for quite a while,” he said. “The stock price has plunged from about $1,000 per share to $0.38 yesterday. Their third-quarter loss was $3.4 billion. I am assuming that the fourth quarter was ugly too.”
Other businesses have used a similar strategy to right themselves, Walden noted. “There are precedents (airlines) of firms going through bankruptcy, reorganizing, and then being commercially viable.”
Nortel a shadow of itself in RTP
Nortel’s fall from being a global technology powerhouse in the late 1990s has been especially felt in the Triangle, where the company once employed about 10,000 – five times its current employment level. And its stock price, if measured against the value created by a drastic reduction in the number of shares, would be more than $1,000 today.
Harvey said the firm has taken three hits: The tech bubble bursting, increased competition for its products and accounting scandals that included fraud charges against a former CEO.
Wednesday’s court move spares Nortel some cash immediately. A $102 million debt payment was to come due on Thursday.
“Thursday was the trigger point (for the decision),” Harvey said. “Chapter 11 gives them protection from this particular payment so they can work out a plan.”
Nortel acknowledged in its filings that it still has some $2 billion in cash. But Harvey said Nortel needs funds to manage its reorganization.
“It is true that they had enough cash to make the $102 million payment,” he explained. “However, they wanted the maximum amount of cash to work through the Chapter 11 process. You don’t wait until you are completely out of cash to go to Chapter 11.”