Nortel has filed for bankruptcy and been delisted from the New York Stock Exchange. The news could foreshadow turbulent times for small and medium businesses as network equipment suppliers take desperate steps to remain solvent. What will happen to Nortel's assets? And how long should you do business with a supplier experiencing financial problems?
Kaboom! That was the sound of one of the networking industry's leading names falling. After unsuccessfully trying to right its business, Nortel, once a serious threat to Cisco, has filed for bankruptcy protection. The announcement could foreshadow turbulent times for small and midsize businesses as network equipment suppliers take desperate steps to remain solvent.
During much of its history, Nortel was one of the largest, most formidable network equipment vendors. In 2000, the company had a market cap of $250 billion and a broad suite of well-known, highly desired products. Since that time, the company has stumbled and bumbled its way from business plan to business plan, hemorrhaging money along the way. As a result, the next plan will be written by a bankruptcy court judge rather than a company executive.
The company is clearly in trouble. Despite generating more than $13 billion in revenue last year, the company's market capitalization slipped below $300 million and has been in a freefall. Its stock has been selling for about 25 cents a share, and the New York Stock Exchange said it would delist it if it stays below the $1 mark much longer -- and it did.
There had been plenty of warning signs. CEO Mike Zafirovski has been trying to turn the company around for three years. Last November, he announced drastic measures: selling its metro Ethernet division, laying off 1,300 employees, and closing facilities with the goal of cutting its operating expenses by $400 million. Those moves turned out to be too little, too late.
Filing for bankruptcy protection is a desperate move, a last-ditch effort to salvage the once high-flying firm. While it may result in creditors receiving less than they are owed, it also transfers the power of running the company from Nortel to bankruptcy judges, a change that could hurt the vendor in many ways. Small and midsize businesses may be less likely to buy the company's products. Suppliers and distributors may think twice before delivering items that they may or may not be paid for.
Don't Miss: What Nortel's Bankruptcy Means For Your Business
Nortel does have some valuable assets. The vendor has a broad product line: wireless equipment, carrier switches, and enterprise gear, including networks switches, VoIP switches, and contact center systems. The company has a customer base investing billions annually in those devices. Putting money away for a rainy day, the firm reportedly still has $1 billion in cash available, but it had been burning through it at a high rate: several hundred million dollars per year.
So the question is: What will happen to Nortel's assets? During the past few years, the network equipment market has gone through a constriction. Recognizing that unit shipment rates were decreasing and competition was increasing, suppliers had been teaming up and trying to gain economies of scales. So, a flurry of mergers took place.
That was until the recent economic downturn. Since then, funds for acquisitions have disappeared as potential buyers have closed up their pocketbooks. As evidence, Nortel's metro Ethernet division represents an attractive asset for the right company, but none has shown much interest in buying it.
Nortel may be the first of many network equipment vendors forced into bankruptcy. During the past few years, many suppliers have been rewriting their business plans to remain viable long term as revenue growth slowed and competition increased. The question for users now becomes: How long do you stick with a supplier experiencing financial problems?
There is no easy answer. Dumping all of the equipment for a new vendor may sound appealing, but it's probably unrealistic in many cases. Keeping it may also cause problems. When companies take steps such as filing for bankruptcy, their service and support usually suffer as employees' attention shifts away from customer needs to their own -- basically, keeping their jobs. The repercussions from vendor financial problems are widely felt; now, not only is Nortel experiencing difficult times but so are its customers.
See more columns by Paul Korzeniowski.
Paul Korzeniowski is a Sudbury, Mass.-based freelance writer who has been writing about networking issues for two decades. His work has appeared in Business 2.0, Entrepreneur, Investor's Business Daily, Newsweek, and InformationWeek.
