RIM thought it had a deal for Nortel’s LTE assets

Research in Motion (TSX: RIM) was interested in buying Nortel Networks‘ Long Term Evolution patents before Nortel filed for bankruptcy protection in January.

This was revealed Friday by Mike Lazaridis, co-chief executive officer of Waterloo, Ont.-based RIM in testimony before the House of Commons Standing Committee on Industry, Science and Technology.

“We were so close to announcing a few days after we thought we had a handshake,” he said. “We were exchanging e-mails about a press release within a matter of days.”

LM Ericsson last month agreed to buy the business unit of Nortel that manufactures products for wireless carriers using code division multiple access (CDMA) technology. Ericsson’s agreement resulted from an auction July 24, which was preceded by a “stalking horse” bid from Nokia Siemens Networks in June.

Nortel is trying to sell its business units and has been operating under bankruptcy protection since Jan. 14.

The emergency hearing Friday of the parliamentary committee was prompted by concerns from RIM officials and politicians including Liberal Leader Michael Ignatieff and Ontario Finance Minister Dwight Duncan.

After Nokia Siemens Networks presented its bid, Waterloo, Ont.-based RIM complained it was effectively shut out of the auction process, and called on the federal government to review the sale. On July 20, RIM stated in a press release “the loss of Canadian ownership of Nortel’s CDMA and Long Term Evolution businesses may significantly, adversely affect national interests, with potential national security implications ….”

But Nortel officials testified Friday the LTE patents will not be transferred to Ericsson. Instead, Ericsson would get the right to use the technology in exchange for paying Nortel licensing fees.

Lazaridis said RIM “came very close to completing” discussions to buy LTE patents before January.

“We were surprise by the bankruptcy announcement” but continued working with Nortel and “expanded the scope” of the purchase, he said.

But the stalking horse agreement resulting from Nokia Siemens’ offer only included rights to licence LTE patents, not to acquire them. This, Lazaridis said, would not have been a good deal for RIM because it wanted to acquire the LTE patents.

“When we felt we had an agreement,” he said. “That’s when we were informed (Nortel was) pursuing other agreements with other companies.”

He added RIM was effectively locked out of the bidding process last month because in order to bid for the carrier wireless assets, it would have to sign a non-disclosure agreement, which included a stipulation that RIM not try to acquire other assets within a year.

“That made no sense” given the company was in liquidation, he said. “If you found a house that you discovered met all your needs… and you started working on a purchase sale agreement and then in the final hour you discovered the owner had given a lifetime lease to another party and given a sublet license to them for that property, then what benefit would there be for you to continue purchasing that house?”

One Canadian analyst says this was poor execution on RIM’s part.

If they weren’t happy they should have tried to bid early, before NSN,” said Ronald Gruia, program leader for emerging telecoms at Frost & Sullivan. “If they had bid before NSN they wouldn’t have had this problem.”

Committee member Mike Lake, the Conservative Member of Parliament for Edmonton-Mill Woods-Beaumont, asked Lazaridis if RIM considered legal action against Nortel.

“We did consider it,” Lazaridis said, adding he needs to be careful in making his comments. “We haven’t finished evaluating all our options to date.”

In earlier testimony, a Nortel official said RIM could have bid had they wanted to.

“The standard (non-disclosure agreement) that we had others sign like Ericsson and Nokia Siemens Networks and MatlinPatterson … was used for RIM,” said George Riedel, chief strategy officer.

Nortel Lawyer Derrick Tay said the bidding process actually was changed due to a request from MatlinPatterson, a New York-based investment firm with about US$400 million in Nortel bonds, which offered US$725 million in July for the unit that Ericsson is buying.

“That option was always open to anyone who had trouble with the process,” Tay said

How Nortel’s LTE patents affect national security

During his testimony, members of parliament asked RIM’s Lazaridis to explain how Ericsson’s bid could harm national security. But Gruia said there are few security aspects to Nortel’s LTE patents.

Nortel officials testified Friday their LTE patents will not be transferred to Ericsson. Instead, Ericsson would get the right to use the technology in exchange for paying Nortel licensing fees.

However, a submission by RIM to the committee states: “If adequate know-how and expertise is not accessible within Canada, it may be difficult to maintain the LTE networks in a crisis. In the event of a national emergency such as a terrorist attack, natural disaster, military attack or epidemic, our Canadian government officials, elected officials, emergency personnel and military personnel will be heavily dependent on wireless networks for communication in order to reduce public panic and coordinate the operations of emergency and public safety personnel and the military.”

In response to a question Friday from Marc Garneau, a Liberal Member of Parliament and former astronaut, Lazaridis said a wireless network based on LTE uses Internet Protocol.

“Just as we protect our land based IP network at our borders with firewalls, this opens us up to a wireless access point” that could be accessed by anyone, he said. “There will have to be carefully designed security technology and standard built into this to ensure it is used for positive means” and can be used by law enforcement, government and industry.

Committee member Lake said his BlackBerry is provided by Rogers. “Rogers network was setup by Ericsson in 1984,” Lake said. “They continue to maintain it. Are we facing a national security risk by using Blackberries on Rogers’ network?”

Lazaridis replied: “If you didn’t use BlackBerry, you’d be facing a national security issue. We designed security into these products.”

He added when RIM acquired Certicom Corp. last year, the U.S. government vetted the sale because Certicom makes Elliptic Curve Cryptography encryption algorithms.

“He used examples that in my view are not quite applicable,” Gruia said. “Pardon me, but the whole business of Certicom revolves around security.

LTE is different, Gruia added.

“It’s not like Nortel as part of its LTE (intellectual property) have some special encryption algorithm that are part of that.”

Lazaridis is calling for a meeting among officials representing his company, Industry Canada, Ericsson and Nortel.

“It’s my belief there is enough room in the current situation to make sure .. if all the parties got together we have an opportunity to come up with something that is more palatable to all the parties.”

In his opening comments, Lazaridis likened Nortel’s selloff to the cancellation by then Prime Minister John Diefenbaker in 1959 of the Avro Arrow project. The Arrow, had it been purchased, would have been a Canadian-designed airplane used by the Air Force to intercept enemy bombers.

“Comparing (the Nortel-Ericsson deal) to the Avro Arrow. My God. That was way over the top,” Gruia said.

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