"The recession hits Nortel, the largest North American maker of telecommunications equipment, as the company announces Chapter 11 plans"
By Tom Giles and Arik Hesseldahl
"Plunging demand for phone gear and a global financial crisis finally caught up with Nortel Networks (NT). The largest North American maker of telecommunications equipment said on Jan. 14 that it's filing for bankruptcy protection in Canada, the U.S., and in Europe.
The company said it would seek creditor protection under the CCAA process in Canada and Chapter 11 bankruptcy proceedings in the U.S. Filings in Europe were to be forthcoming. The company said it had sufficient cash on hand—$2.4 billion—to fund ongoing operations, and the company's business would continue without interruption. Affiliates in Asia, the Caribbean, and Latin America are not included in the filing.
Under Chief Executive Mike Zafirovski, the company embarked on an ambitious turnaround in 2005 that involved selling off businesses and eliminating jobs.
But as the recession took hold, customers delayed telecom gear purchases, sending Nortel's sales into a tailspin. Competition from rivals including Huawei also took a toll. "Nortel must be put on a sound financial footing once and for all," Zafirovski said in a statement. "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."
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Bankruptcy by Choice
Nortel had $2.6 billion in cash and $4.5 billion in debt at the end of September and has been burning about $300 million to $400 million in cash per quarter, says Nomura analyst Richard Windsor. The company might have been able to "stumble along for about a year or two" before being forced into bankruptcy, he says. "This action has not been forced. The idea is to do something decisive rather than be broken up and sold off at extremely distressed valuations."
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