Nortel Restructuring: Breathe And Relax

Nortel has initiated a restructuring process in an attempt to turn the company around. Despite the doom and gloom about the announcement, Nortel is far from a fire sale. Restructuring may be a good step to get control of the company. With $2.4 billion in cash, Nortel is in a far different position than U.S. automakers. Nortel has been struggling for the last few years to turn its business around.President and CEO Mike Zafirovski has been unsuccessful so far in affecting change. The global economic slump simply accelerated what seemed to be an inevitable end. It is not time, however, to panic and start dumping Nortel equipment. Steve Schuchart, principle analyst for data centers with Current Analysis, takes a wait and see attitude. "The impact of restructuring is unclear until the changes are made public. There will be companies to support Nortel's customers if Nortel sells divisions or the company is broken up."

Nortel's revenue, some 38.6%, comes from the carrier markets, according to their consolidated quarterly filings in November of 2008 for the nine months ending in September, while enterprise solutions makes up 24%. Nortel's operating margins for the carrier market remains positive at $523 million, the enterprise market had a loss of $50 million. The carrier market isn't that rosy, with the company showing revenue down 2% year over year. However, there has been a general downturn in the tech industry as enterprises hunker down and put off capital expenditures. A few segments, including Global Services, seem to be alive and well within Nortel.

According to Alan Weckel, a Director with the Dell'Oro Group, Nortel is a leader in the PBX market measured by lines shipped, but was recently surpassed by Cisco, falling to second place. Cisco continues to put pressure on all voice and unified communications vendors leaping from 6th in market size two years ago to first place, according to Dell'Oro research. Nortel's strategic alliance with Microsoft to support and resell Office Communications Server is suffering tough times in the face of Cisco's rise and the economic downturn slowing projects like VoIP and Unified communications.

Nortel is going to have a tough time retaining its position in the telecom space and regaining ground in the enterprise. With competitors like HP's ProCurve and 3Com making inroads in the switching space in the United States and, more important, in the growing Asia-Pacific market, Nortel will have to duke it out from a weakened position. Even while acknowledging Nortel as a dominant player in the telecom space, bankruptcy proceedings will serve to drive more interest in Alcatel-Lucent and Cisco for telecom equipment.

Nortel has a broad product portfolio and in Weckel's opinion, were simply unable to focus their product offerings. Their router and switch gear is competitive with other vendors offerings like Cisco, HP Procurve, and 3Com, the market leaders, but its inability to gain new customers is hampering its efforts.

The key here is not to panic if you are a Nortel customer. It is entering bankruptcy from a pretty good position with liquid assets to rely on, but the picture isn't rosy. I can't think of a company that emerged from Chapter 11 in a strong position, even though that is the common spin. Unlike startups that fail, Nortel has a channel and support chain that will be able to maintain its gear in the future so you will likely be able to maintain support contracts on existing equipment. In all likelihood, underperforming divisions will be sold off, and the remainder will be slimmed down and focused on specific market areas. I hate to kick a company when it is down, but if you're looking at Nortel for equipment purchases, I'd really examine the competition, lest you find your purchase has been reorganized out of Nortel.

For those of you continuing to use Nortel equipment, the International Nortel Networks Users Association (INNUA) is stepping into help. "INNUA represents thousands of Nortel's customers who remain committed to Nortel solutions. The majority of our members have been Nortel customers for more than 10 years. We appreciate how proactive Nortel has been with this decision and their affirmation of the support for their customers during this time" said INNUA President, Steve Ford. "We fully support Nortel's decision and trust it will bring an even stronger focus to the enterprise solution set."