Nortel Seeks Bankruptcy Protection

Nortel Networks, the telecommunications company, filed for bankruptcy protection in Canada and the United States on Wednesday.

The move was accompanied by promises of yet another restructuring. Nortel has struggled to recover from the collapse of technology stocks early in the decade as well as an accounting scandal that led to criminal charges against its former management.

Nortel’s board unanimously approved the bankruptcy filing at a meeting in Toronto on Tuesday night. It appears to be an attempt to avoid $107 million in interest payments that are due on Thursday. That amount equals about 5 percent of the company’s rapidly depleting cash reserves.

“Nortel must be put on a sound financial footing once and for all,” the president and chief executive, Mike S. Zafirovski, said in a statement issued shortly after the company submitted its Chapter 11 filing in Delaware. “These actions are imperative so that Nortel can build on its core strengths and become the highly focused and financially sound leader in the communications industry.”

Since the beginning of the decade, Nortel has started a series of restructurings that have included 16 rounds of layoffs.

Some analysts, however, question whether the company will be able to persuade its creditors and the courts that it now has a formula for success, raising the prospect that its operations might be broken up or the company liquidated.

Investors had little apparent faith in the company whose shares once reached 123.10 Canadian dollars on the Toronto Stock Exchange. Adjusted for a 10 to 1 consolidation, they closed at just under 4 Canadian cents on Tuesday.

A further ominous sign for the company is its apparent inability to sell a business unit that makes Internet-related equipment, which Nortel put up for sale in September.

In November, Nortel announced a third-quarter loss of $3.4 billion, much of that related to write-downs in the value of several operating units.

The bankruptcy filing will also make it more difficult for Nortel to close sales in an already difficult market. Neither telecommunications companies nor large corporations, which Mr. Zafirovski had targeted as Nortel’s great hope for sales, are likely to trust their communications systems to a company with an uncertain future.

The government of Canada has offered Nortel some support. Export Development Canada, a government-owned bank and insurer, has agreed to provide the company with up to $30 million in loans for the next 30 days. Nortel said in its statement that it is negotiating a longer-term arrangement.

About 6,000 of Nortel’s 26,000 remaining employees are based in Canada, many at its research labs in Ottawa. But it is unclear how far the Canadian government is willing to support the company. Unlike, say, automakers, it is possible that Nortel may shift many of its jobs now in Canada to low labor cost markets such as India and China.

In its early restructurings, Nortel sold or closed it manufacturing operations and outsourced production. Nortel said it had an agreement with Flextronics, its crucial contract manufacturer, to continue supplying its operations until July. That deal, however, must be approved by a court in Toronto.

[Source: By Ian Austen, Herald Tribune, Ottawa, 14Jan09]

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