Nortel… Fact, fiction and impact

The Nortel Networks decision to file for creditor protection has resulted in a certain amount of “noise” and misinformation relative to the filing, the process, the impact and the intended outcome.

It’s no secret that Nortel’s ongoing financial problems have three basic causes: legacy debt, restructuring costs and heavy pension load. The process of filing for creditor protection is often confused with liquidation.

At the present time, it’s Nortel’s stated intention to execute a restructuring plan that will allow them to emerge as a stronger, and more efficient organization.

What is happening?

During a recent address to the consulting community on February 4, Joel Hackney, president – Enterprise Services pointed out that Nortel was still actively delivering products, engaging in ongoing R&D, and providing support and services for their existing installed base.

The major channel partners (Bell, Telus, Verizon, IBM and British Telecom) appear to be supporting Nortel through this process. Mr. Hackney also stated that Nortel has $2.4 billion on hand to meet their ongoing business needs.

Why ask for protection now?

The financial downturn has probably played a role in the timing of this decision; but the ability to carry on day to day operations would also be a significant part of the decision making process. According to Hackney, it was important for this process to take place while the company was still liquid, and had the reserves necessary to carry on normal business operations.

What is the process?

There are a few basic steps in the reorganization. First is the pre-filing, which involves a substantial amount of work to prepare the ground work for the filing process.

After the filing, there is a process of stabilization which allows daily business process to carry on, while negations begin with the affected parties. From this process, a plan of reorganization is developed which allows the company to move forward with a more permanent reorganized company.

Finally, the company will exit the creditor protection stage. Without committing to any timeline, Hackney indicated that this process could take up to 36 months.

What is the impact?

This process with involve pain for some parties, both internal and external. Even though there is a plan in place and business operations are continuing, the underlying issues must still be addressed. Arrangements must be made with the debt holders to reduce or eliminate the legacy debt. This will have impact on individual and institutional debt holders.

In addition, there are anecdotal reports of laid-off employees not receiving severance packages from the last round of layoffs. These severance packages, in part, contribute to the overall restructuring costs of the business. However, this has a significant impact on people looking for work in a difficult labour market.

The other issue recently discussed is the pension deficit. It is has been estimated by analysts that the deficit could be between $2.5 billion and $2.8 billion. Numbers of this magnitude make headlines, but it’s important to review the underlying actuarial assumptions and the approach that companies take to resolve pension deficits.

Normally, companies have a number of years to correct these shortfalls and a deficit of this size could require an annual contribution in the order of 500 million dollars.

Over time, these pension deficits can be ameliorated by improvements in the equity markets. As the rate of return of the investments from the pension fund improve, then the size of the deficit can be reduced.

All of this uncertainty has to take a toll on the people whose physical and intellectual contribution keeps Nortel operating.

— Bill Elliott is a director with Fox Group Telecom Consulting

Note from Fox Group: We have had a few readers provide us with examples of their individual situations and the effect the above two items have had on them during the past few months. This certainly puts things in a very different light when you learn about how the Nortel employees are affected by the corporation’s decisions.

Fox Group wishes everyone at Nortel well, and will continue to monitor the this situation. It is important during times of uncertainty, to attempt to separate fact from fiction and avoid sensationalized rhetoric.

We continue to recommend Nortel products for consideration by our enterprise clients. We at Fox Group believe that the company and their products should be given consideration, and that no matter what happens, they will continue to be supported in the marketplace due to the large installed base with support and maintenance revenue, and future upgrade/replacement potential revenue.

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